Analysis: S Korea's appetite for US crude continues to wane as costs rise, middle distillates demand tepid

South Korea is expected to continue cutting back US crude purchases in 2021 as North American export grades no longer hold competitive edge over Middle Eastern sour crudes, while local refiners remain reluctant to buy high volumes of middle distillate-rich US grades due to dismal domestic demand for gasoline and jet fuel amid the prolonged coronavirus pandemic.

South Korea imported 104.4 million barrels of US crude oil in 2020, down 24.3% from 137.9 million barrels received in 2019 and putting an end to the sharp uptrend in North American feedstock imports that started from 2015, latest data from state-run Korea National Oil Corp. showed.

The country's US crude imports in December 2020 tumbled 65.4% year on year at 4.6 million barrels, marking the biggest decline since it began North American crude purchases in 2015, the data showed.

The downturn in 2020 shipments meant that South Korea has surrendered its top Asian US crude buyer status to China. China has been actively purchasing light sweet and medium sour US grades since late in the third quarter of 2020 as Beijing stepped up efforts to comply with the Phase 1 trade deal it struck with Washington early that year.

As major South Korean refiners become increasingly sensitive to feedstock prices and refining margins amid volatile domestic and regional transportation fuel demand fundamentals as well as the series of movement restriction measures adopted during the ongoing pandemic, crude importers were quick to shun North American cargoes due to the sharp rise in US crude import costs, industry officials and refinery feedstock management sources told S&P Global Platts.

"North American crude benchmark WTI used to trade at a discount to Dubai a few years ago despite US crude's superior quality over Middle Eastern sour grades, but such discounts have dissipated since mid-2020. WTI's competitive prices a few years back was one of the biggest factors that stoked US crude demand, but 2021 purchases will be limited considering how cost-sensitive refiners are, especially in times of market uncertainty," a feedstock trading manager at a major South Korean refiner said.

The spread between WTI Magellan East Houston, or MEH, on a CFR North Asia basis and Abu Dhabi's Murban on an Asia delivered basis has averaged minus 38 cents/b in 2018 and minus 6 cents/b in 2019, Platts data showed. However, the spread flipped to a premium in 2020, averaging $1.27/b last year and it has averaged $1.07/b to-date in 2021.

Related subscriber note: Platts proposes implementing 60% freight adjustment factor on WTI Midland FOB Scapa Flow crude oil assessment

South Korean refiners have paid an average $52.27/b for US crude imported in 2020, sharply higher than the $44.12/b paid for shipments from Saudi Arabia, the KNOC data showed. In 2019, South Korea paid on average $65.17/b for shipments from the US, cheaper than an average of $66.87/b paid for Saudi crude cargoes received in the year.

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

Reflecting the waning competitiveness, South Korea is expected to cut US crude imports in H1 2021 by around 47% year on year at 35 million barrels, according to feedstock managers at four major South Korean refiners surveyed by Platts.

Feedstock preference

Apart from the import arbitrage economics, US crudes have fallen out of favor as refiners do not necessarily need light sweet grades to boost middle distillate product yields amid dismal transportation fuel demand, analysts at Korea Petroleum Association and KNOC told Platts.

"Highly sophisticated South Korean refineries are more than capable of producing high-value products from medium and heavy sour crudes. Adding light sweet crudes in the feedstock blending process certainly helps refiners fully maximize their middle distillates output, but there's no such need when consumer demand for transportation fuels is so fragile," a market research analyst at KPA based in Seoul said.

The country's gasoline consumption drop 6.1% year on year to 80.95 million barrels in 2020, while jet fuel demand tumbled to 21.7 million barrels last year, down 44% from 38.8 million barrels in 2019.

Accordingly, major South Korean refiners found a staple Saudi crude diet as the most reliable and economical feedstock option in times of market uncertainty, backtracking on efforts to broaden their crude supply sources in the previous years and shifting focus back to the feedstock that the refinery systems are most comfortable with.

South Korea's total crude imports in 2020 fell 8.6% to 980.3 million barrels, but the country increased crude imports from its top supplier Saudi Arabia to 327.1 million barrels last year, up 10.% from 2019.

=====================================================

South Korea's top 10 crude suppliers in 2020 (Unit: '000 barrels)

*Includes other suppliers

Source: Korea National Oil Corp.