Asian refiners weigh crude stockpiling amid Middle East tensions, trade flow stable

Refiners across Asia are reassessing the need to bolster their emergency crude reserves amid rising geopolitical tensions in the Middle East. However, unfavorable storage economics and a general confidence in the stability of shipping flows between the Persian Gulf and Asia may restrict their stockpiling efforts.

The tensions in the Middle East reached new heights after Tehran threatened to close the Straits of Hormuz following the US strikes on Iranian nuclear facilities June 22, prompting refiners across Asia to brace for potential disruptions in their Middle Eastern crude deliveries and consider stockpiling feedstock crude as a precautionary measure.

In Thailand, a state-run refiner and a petrochemical company have indicated that they are evaluating the need to increase feedstock crude and naphtha reserves by 20% or more in preparation for any potential disruptions to Persian Gulf-East Asia maritime logistics, while energy permanent secretary Prasert Sinsukprasert highlighted that it may become necessary for Southeast Asia's second biggest crude buyer to bolster its oil reserves to ensure energy security.

Thailand's Department of Energy Business has stated that the country possesses sufficient oil reserves for around 60 days.

Meanwhile, Japanese refiners are extremely keen to boost their emergency feedstock inventories due to the country's significant reliance on Persian Gulf-Asia trade flows.

Three major refiners in Japan, including ENEOS, have indicated that it may be necessary to add as little as 5 million barrels to as much as 40 million barrels of crude oil to their emergency stocks, just in case the maritime passage of Middle Eastern sour crude to the Far East is severely disrupted.

As of the end of March, Japan had around 449.47 million barrels of petroleum reserves, which is enough for 247 days of domestic consumption.

In South Korea, at least two major private refiners based in Ulsan indicated that they have emergency stocks of crude oil and oil products that could sustain their facilities at a minimum operational level and meet basic commercial fuel needs for at least 220 days.

Feedstock management sources at both refiners told Platts, part of S&P Global Commodity Insights, that the refinery operation executives are evaluating the need to extend the reserves to last more than 300 days.

As for the state reserves, South Korea currently holds 99 million barrels of strategic reserves, which is equivalent to around 116.5 days' worth of domestic demand as recommended by the International Energy Agency, according to the energy ministry and Korea National Oil Corp.

In China, refiners generally adopted a more relaxed approach as Asia's giant oil consumer has plenty in its inventory.

An official with a state-owned oil giant said that China's crude stocks are at comfortable levels, and Chinese refiners can access the commercial stocks to offset the pressure from rising oil prices.

China's independent refineries indicated that they are not in any hurry to purchase crude cargoes given the plentiful inventories in their floating storages.

China's commercial crude stock reached a record high of 988.6 million barrels in the week starting June 12, while the SPR remained steady at 208.6 million barrels.

Normal business to resume

Traders in Singapore with direct knowledge of daily spot and term Middle Eastern sour crude and oil product flows to East Asia told Platts that cargoes from the Persian Gulf are currently loading without any disruptions, although there is a prevailing sense of caution amid regional tensions.

Asian traders are broadly estimating a greater than 50% likelihood that the Strait of Hormuz will remain open. Despite concerns regarding navigation difficulties and accident risks in the area, there are no current indications of changes to loading schedules or a rush among buyers to expedite their shipments, according to sour crude traders based in Singapore.

"Both Israel and Iran have been seriously damaged... why would they make matters worse by making more enemies by disrupting crude supplies and trade flows to East Asia," said a feedstock and logistics manager at South Korea's S-Oil.

Escalating tensions may trigger military responses from East Asian nations, as major economies in the region would be significantly impacted if sour crude flows were disrupted. Both Iran and Israel are likely to avoid harming commercial tankers bound for the Far East, recognizing that China, South Korea, and Japan all rank among the world's top ten military powers, according to traders, analysts and refinery sources across Asia.

"The chances of Iran closing the Strait are minimal, as that would mean opposing all other nations," said a feedstock management source at a Chinese independent refiner based in Shandong.

Meanwhile, many traders indicated that the steep backwardation in the oil price structure could result in substantial losses for refiners if they accumulate excess inventory.

Platts assessed the spread between first and second-line Dubai crude swaps at $1.71/b on June 20, marking the steepest backwardation in the near-term forward month price curve since $2.55/b Jan. 31.

A backwardation in the crude market structure indicates lower prices for forward-month contracts compared to the current spot price. Essentially, backwardation happens when market participants anticipate that future prices will be weaker than prompt prices, thus providing little incentive to store oil for future use.