South Korea opts for US crude over Gulf barrels, but FTA with UAE could be game changer

High Persian Gulf-Asia tanker insurance fees and a narrow Brent-Dubai price spread continued to lure South Korean refiners to US crude, but a free trade agreement could make oil shipments from the UAE cheaper going forward and challenge the status quo, refinery and trade sources said over May 27-30.

Asia's third-biggest crude importer took 28.19 million barrels from Saudi Arabia in April, down 5.1% from a year earlier, while US imports, mostly light sweet grades including WTI Midland, rose 13.8% on the year to 12.37 million barrels, latest data from state-run Korea National Oil Corp. showed.

Shipments from Kuwait in April fell 33.6% year on year to 5.73 million barrels and crude imports from Qatar slipped 0.6% on the year to 6.65 million barrels last month, KNOC data showed.

Feedstock and logistics management sources at major South Korean refiners, as well as other crude importers across East Asia indicated that arbitrage economics for purchasing North American crude have generally been ideal for light sweet US crude imports so far in 2024, while higher Persian Gulf-East Asia freight and expensive shipping insurance costs bode ill for Middle Eastern sour crude cracking margins.

South Korean refiners paid on average $89.41/b for Saudi crude shipments in April, $2.5/b more than the monthly average of $86.91/b paid for US volumes received in the same month, KNOC data showed. KNOC's import cost data includes freight, insurance, tax and other administrative and port charges. Refiners also paid $1.61/b less for US crude than Kuwaiti barrels last month.

Meanwhile, the Brent/Dubai Exchange of Futures for Swaps, or EFS spread -- a key indicator of Brent's premium to the Middle Eastern benchmark -- averaged $1.45/b to-date in 2024, down from 2023 average of $1.77/b, S&P Global Commodity Insights data showed. A weaker EFS makes various sweet crude grades produced in the Americas, North Sea and Africa that are linked to the European benchmark more economical compared with Dubai-linked Middle Eastern grades.

Although the ongoing Israel-Iran conflict and Red Sea maritime security risks have not led to any meaningful crude supply and trade flow disruptions for Asian refiners, logistical costs for Middle Eastern crude delivery have been rising, especially due to high shipping insurance premiums, prompting many South Korean and other Asian refiners to pick up more spot cargoes from non-Persian Gulf suppliers.

"[Persian Gulf-Asia] VLCC availability is good actually, but insurance fees and other security-related costs have surged, adding to the overall cost of delivery," a feedstock and logistics manager at another South Korean refiner based in Ulsan said.

Apart from the US crude shipments, South Korea also imported 2.78 million barrels from Brazil in April, almost a threefold jump from 975,000 barrels received a year earlier, KNOC data showed.

FTA with UAE

In an effort to strengthen South Korea's Middle Eastern crude supply security and lower crude procurement costs in times of high inflation and weak local currency, Asia's fourth-biggest economy signed a bilateral free trade agreement with UAE on May 29.

The 3% tariff on crude imports that South Korea has levied will be removed for shipments from the UAE over the next 10 years.

South Korea and the UAE will also cut tariffs on naphtha trades by 50% over the next five years under the deal, implying that a 0.5% tariff on naphtha inflows from the UAE will be lowered to 0.25%, while a 5% tariff on naphtha imports from South Korea will be cut to 2.5%.

South Korean refiners paid on average $88.60/b for crude shipments from UAE in April, $1.69/b more than the US crude received last month, KNOC data showed.

"We are very much looking forward to the tariff removal on all UAE crude grades including Murban, Upper Zakum and Das Blend... the FTA also means that South Korean traders would gain a significant edge when competing for Abu Dhabi crude cargoes in the spot market," a feedstock management source at a major South Korean refiner said.

The South Korea-US FTA allowed cost cuts of as much as $2/b for purchasing WTI Midland crude, a trading source at a South Korean refiner's feedstock procurement team based in Singapore told Commodity Insights previously.

South Korea was Asia's top customer of US crude in 2023, taking 142.4 million barrels last year.

In total, South Korea imported 90.41 million barrels, or 3.01 million b/d, of crude in April, up 11.4% from a year earlier. In the first four months, South Korea imported a total of 351.16 million barrels of crude, up 2.8% from a year earlier, KNOC data showed.

South Korea's top 10 crude suppliers in April (Unit: '000 barrels)

Source: Korea National Oil Corp.