Commodities 2022: South Korea to continue favoring US crude amid OPEC supply uncertainty

South Korea's imports of US crude oil are estimated to have to surpassed 120 million barrels in 2021, and the country is expected to maintain its top Asian US crude buyer status in 2022 as local refiners greatly favor North American feedstocks due to uncertainties over OPEC supply and attractive procurement costs.

The country's major refiners including SK Innovation and GS Caltex received a combined 11.6 million barrels of US crude in November, up 76.6% from a year earlier and up 16.8% from October, data from state-run Korea National Oil Corp. showed.

Over January-November, South Korea received 113 million barrels from the US, placing it second behind Saudi Arabia on its top suppliers' list for the period, the KNOC data showed.

At least four VLCCs of US crude have arrived to date in December and the total 2021 intake would be at least 120 million barrels, up from 104.4 million barrels in 2020 and second highest annual volume on record, according to feedstock managers and trading sources at major South Korean refiners with direct knowledge of US spot cargo trade flows.

With uncertainty surrounding OPEC members' crude production strategy for 2022, combined with ongoing market jitters over the global demand outlook amid the prolonged COVID-19 pandemic, the US would continue to be an ideal refinery feedstock supply source for 2022 as the North American producer offers flexible spot cargo purchase options in large volumes, trading managers at the major refiners and analysts at the Korea Petroleum Association said.

Top non-OPEC supply source

South Korean refiners said the companies have mostly completed their first half 2022 term supply discussions with major Middle Eastern producers, but they have left a lot of room for spot procurement, especially from the US and South America.

Refiners are generally adopting a trading strategy to minimize term deals while making more room for flexible spot procurement for 2022, taking into consideration the volatile supply-demand dynamics during the pandemic, according to the refinery sources.

"The major Middle Eastern producers couldn't give us a straight answer when asked about minimum and maximum term supply volumes they could offer because the OPEC members are also struggling to assess the global demand recovery outlook and their own production hike strategy for 2022," said a feedstock trading strategist at a major South Korean refiner.

"End-users are generally cautious not to over-commit to fixed term deals because another wave of major setback in global demand would lead to a massive stockpile of unwanted crude oil. Meanwhile, if OPEC decides to continue keeping a tight supply strategy, South Korean refiners could take extra VLCCs from the US thanks to their extensive US supply and trading network," the strategist added.

At least two-thirds of South Korea's Middle Eastern crude imports over the past five years were based on fixed term deals, while most of the US crude shipments come as flexible spot market purchases, according to industry and trading participants in Seoul.

Reflecting OPEC and its allies' cautious approach in 2021, South Korea's crude imports from major Middle Eastern producers have mostly declined.

Shipments from top supplier Saudi Arabia over January-November fell 13.1% from a year earlier to 256 million barrels, while imports from Kuwait fell 18.1% year on year to 113 million barrels, the KNOC data showed.

OPEC and its allies are standing firm on increasing crude output quotas by a modest 400,000 b/d each month. In contrast, nine major Asian refiners surveyed by S&P Global Platts -- including SK Innovation, PTT, BPCL, ENEOS and PetroChina -- indicated the producer group should ideally raise supply by at least 800,000 b/d as current oil prices appear too high and consumer sentiment is hurt by prices at these levels.

Higher quality at lower prices

South Korean refiners are also attracted to lower import costs of US crudes as the companies find North American cargoes more economical in times of high Middle Eastern OSPs.

South Korean refiners hold a big advantage over other Asian end-users when it comes to US crude trades due to the US-South Korea free trade agreement, while Seoul continues to grant some freight incentives for refiners buying crude oil from regions other than the Middle East, according to feedstock management and trading sources at two major South Korean refiners.

South Korean refiners paid on average $69.88/b for US crude shipments over January-November, according to the KNOC data. In comparison, the refiners paid on average $70.70/b for Saudi crude over the same period, while shipments from Kuwait averaged $70.84/b.

A slew of major Middle Eastern sour crude producers increased their January 2022 official selling prices for Asia-bound cargoes despite fears about the impact of the omicron variant on global oil demand.

Saudi Aramco boosted its Asia OSP for Arab Medium crude for loading in January by 70 cents/b from its December price to a $3.05/b premium to the monthly average of Oman/Dubai, while Iraq's State Oil Marketing Organization set its January OSP for Basrah Medium crude at a premium of $1.40/b to Oman/Dubai, up 50 cents/b from December.

South Korea's top 10 crude suppliers

(Unit: '000 barrels)

*Total includes other suppliers

Source: Korea National Oil Corp.