Analysis: South Korea could favor US crude over Saudi Arabian in H2 amid rising Aramco OSPs

South Korean refiners have paid at least $1/b less for US crude oil than Saudi Arabian grades in the first half of 2021, prompting feedstock trading and procurement managers to strongly favor North American barrels for the next several trading cycles, after taking into consideration the uptrend in Saudi Aramco official selling prices and slower-than-expected OPEC supply hikes.

The world's fifth largest crude importer received 11.38 million barrels oil from the US in June and paid $68/b on an average for the monthly shipments, showed latest data from state-run Korea National Oil Corp. South Korea imported 21.97 million barrels of crude oil from Saudi Arabia last month and paid $72.50/b on average.

KNOC's import cost figures include freight, insurance, tax and other administrative and port charges.

For the first six months, South Korean refiners paid on average $63.06/b for 55.2 million barrels imported from the US, while 131.2 million barrels of Saudi Arabian crude shipments during the period cost the companies $64.34/b on average, the KNOC data showed.

The government continues to grant some freight incentives for refiners buying crude oil from regions other than the Middle East, but it is still unusual to see higher quality crude grades like light sweet US oil to cost much less than high sulfur Persian Gulf grades, refinery sources and analysts at Korea Petroleum Association told S&P Global Platts.

"South Korea is purchasing around 10%-15% less crude oil than 2019 -- the prepandemic year -- but when it comes to preference, US crude is looking much more attractive than Saudi cargoes," said a sweet crude and condensate trading manager at a major South Korean refiner, who declined to be identified due to the sensitive nature of corporate trading relationships.

"Saudi Aramco may need to speed up its production hike and sharply cut its official selling prices, otherwise lighter and sweeter superior US grades will continue luring Asian buyers," he added.

Meanwhile, the Brent-Dubai price spread has been rallying this year, which typically makes many light sweet crude grades outside the Middle East priced against the European benchmark less attractive.

However, the widening Brent-Dubai spread does not exactly close the North American arbitrage window for South Korean refiners as the companies usually trade US grades on a Dubai pricing basis, trading desk managers in Seoul and Singapore told Platts.

The Brent/Dubai Exchange of Futures for Swaps, or EFS, spread -- a key indicator of Brent's premium to the Middle Eastern benchmark -- has averaged $3.91/b to date in the third quarter, compared with the $3.31/b average in the second quarter, $1.85/b in the first quarter, and the average of 4 cents/b in 2020, Platts data showed.

Expensive Aramco OSPs

Saudi Arabian crude grades in general appear expensive following the sharp uptrend in Aramco's OSPs, with the OPEC kingpin keeping a tight control over its production volumes.

Aramco has set its OSP for Arab Light crude for loading in September and bound for Asia at a premium of $3/b to Dubai/Oman, compared with a premium of 30 cents/b for the grade loaded in January and a discount of 50 cents/b set for cargoes loaded in December 2020, Platts data showed.

Asian refiners and trading companies said Saudi Arabian grades will likely continue to command lofty premiums as the country's production and exports remain tight overall.

OPEC and its alliance clinched an agreement July 18 to ease production cuts by 400,000 b/d each month starting in August, but many Asian refiners and traders said the pace of the supply hike is slower than desired.

Platts surveyed 11 major Asian refiners and trading companies before the July 1 OPEC+ meeting, and they had hoped the producer alliance would return at least 1 million b/d supply to the market in August-September amid the recent oil price rally.

With ultra-low interest rates and aggressive monetary easing policies expected to continue supporting broad assets, commodities and energy prices, Asian end-users and consumers have called for OPEC+ to at least play its part in controlling the highly inflated oil prices for the benefit of global consumer sentiment and demand recovery.

Platts assessed the physical Middle Eastern sour crude benchmark Cash Dubai at $70.75/b Aug. 6, up 35% from $52.44/b assessed in the first trading session of the year on Jan. 4.