Commodities 2021: Northeast Asia set to make U-turn on crude import diversification strategy in 2021

Major Northeast Asian refiners are poised to heavily favor Middle Eastern crude over other grades produced outside the Persian Gulf region at least during the early half of 2021, as the companies see their staple Saudi oil diet as the most reliable and economical feedstock option in times of market uncertainty.

The region's big three crude importers China, South Korea and Japan have put the brakes on crude import diversification efforts since the outbreak of the coronavirus pandemic, with the share of Middle Eastern grades in their overall feedstock import basket seen rebounding this year.

China, for one, has backtracked on efforts to broaden its crude supply sources as newly commissioned refineries opted to process Middle Eastern crude grades, the feedstock that the country's overall refinery systems are most comfortable with.

"Middle Eastern producers have been making efforts to secure their sales outlets in Asia as demand from Western countries are shrinking. The strategy supports Chinese refineries' needs," a Beijing-based crude trader with a Chinese state-owned oil giant said.

No matter new or old, state-run or private, most of them are designed to crack primarily Middle Eastern medium sour crudes, the state-run refinery source said.

Meanwhile, South Korea has been aggressively cutting back on light sweet US crude purchases in recent trading cycles, while receiving more Saudi crudes, latest data from state-run Korea National Oil Corp. showed.

"Buying arbitrage cargoes and exotic crude grades is considered as a bit of a gamble and luxury ... luxury that we cannot afford during times of weak fuel consumption and volatile prices," a feedstock trading manager at a South Korean refiner said.

South Korean refiners paid an average of $43.72/b for Saudi crude imported so far this year, sharply lower than the $53.27/b paid for shipments from the US, the KNOC data showed.

North American benchmark WTI used to trade at a steep discount to Brent and Dubai a few years ago, but such discounts have dissipated this year, feedstock trading managers based in Singapore, Seoul and Hong Kong said.

Japan has also slashed crude imports from the US by more than half in the first ten months of this year, while major Middle Eastern suppliers including Saudi Arabia, UAE, Kuwait and Qatar firmly held the top four supplier positions for Asia's third biggest petroleum importer, latest data from the Ministry of Economy, Trade and Industry showed.

Japan's largest refiner ENEOS intends to focus on procuring crude from the Middle East in 2021 because of its relatively shorter voyage time compared with other markets such as the US and also due to the prolonged uncertainty over demand recovery, a company executive said earlier.

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Asian market share

The share of Middle Eastern crude in China's total feedstock import basket expanded to 45.8% over January-October, with UAE, Iraq, Oman and Kuwait lifting their shipments by more than 20% year on year, data from China's General Administration of Customs showed.

In comparison, the Middle Eastern producers' market share was 41.4% in 2019, recovering from the lowest level of 36% in 2017.

The share of Middle Eastern crudes in South Korea's import basket in the first 10 months was 69%, higher than the 67.1% in 2019 and 68.4% in 2018, according to S&P Global Platts calculation based on Korea National Oil Corp. data.

The share of Middle Eastern crudes was more than 82% in 2015 and before.

South Korea made rigorous efforts to diversify its crude import sources over the past several years, but the diversification strategy should be put on hold for the time being due to the special circumstances, according to officials at major South Korean refiners as well as market analysts at KNOC and Korea Petroleum Association.

In Japan, Middle Eastern crude accounted for 91.9% of total imports through January-October, compared with 87.4% in 2019, according to Platts calculation based on METI data.

The Platts calculations excluded Iranian barrels as many Northeast Asian refiners halted crude imports from the Persian Gulf supplier since May 2019 due to international sanctions on Tehran.

New Chinese plants

China's dependence on Middle Eastern crude is set to increase further next year as the country's greenfield refineries are designed to crack mostly medium and heavy sour Persian Gulf grades.

Sinopec's 200,000 b/d Zhongke Refining & Chemical processed mostly Kuwaiti crude since its commissioning in June.

Middle Eastern grades accounted for 88% of the crude slate of the 400,000 b/d Zhejiang Petroleum & Chemical, or ZPC, during the same period.

ZPC started trial runs at one of its CDUs at the 400,000 b/d Phase 2 project in Nov. 1. Similar to the Phase 1 project, the Phase 2 plant will likely run primarily on Saudi grades.

Moreover, another greenfield, the 320,000 b/d Shenghong Petrochemical plant, which is expected to complete construction in Q3 2021, is configured to process Saudi Arabia's Light and Arab Heavy grades.