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S Korea's US crude imports may fall 20% to 62 million barrels in H1: survey

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Singapore — US crude suppliers could fall victim to the price war triggered by Saudi Aramco's latest move to slash official selling prices in Asia, with South Korea rapidly losing its appetite for light sweet North American grades amid WTI's narrowing discount against Dubai.

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South Korean refiners imported 11.67 million barrels of US crude oil in February, down 5.8% from 12.39 million barrels received a year earlier, marking the biggest decline since the country began importing US crude on a regular basis in August 2017, latest data from Korea Customs Service showed.

As a result, Kuwait overtook the US to be South Korea's second-biggest crude supplier in February behind Saudi Arabia, the customs data showed.

Asia's biggest US crude importer is poised to further trim its purchases from the North American producer as the narrowing WTI-Dubai benchmark price spreads and recent sharp cuts in major Middle Eastern crude official selling prices provide an impetus for South Korean refiners to favor Persian Gulf grades over light sweet US crude.

"Price is the single most important factor in our crude procurement strategy," an official at South Korea's biggest refiner SK Innovation said.

South Korean refineries are more suited to medium and heavy grades from the Middle East, which were also more competitive in terms of shipping costs, he added.

South Korea could see its crude imports from the US tumble to around 62 million barrels in the first half of 2020, according to feedstock procurement managers and trade sources at major South Korean refiners SK Innovation, GS Caltex and Hyundai Oilbank surveyed by S&P Global Platts.

The survey estimate is equivalent to around a 20% fall from the 77.67 million barrels imported during H2 2019, Platts calculations based on KNOC data showed.

The restart of a price war among producers will have a significant impact on oil supplies for non-OPEC countries. The US would be the main target of Saudi Arabia and Russia in order to regain market share, according to JY Lim, oil markets adviser at S&P Global Platts Analytics.

ARBITRAGE ECONOMICS

WTI's steep discount to the Middle Eastern price benchmark Dubai has played a big part in South Korea's voracious appetite for US crude oil over the past couple of years, industry officials and refinery sources in Seoul said.

However, as the North American benchmark loses its competitive edge with Middle Eastern suppliers sweetening their offers to Asian buyers, US crude suppliers could lose their grip on the South Korean market, a Seoul-based Korea Petroleum Association official said.

The sustained weakness in the Dubai market has eroded much of WTI's discount to the Middle Eastern pricing benchmark.

The spread between the front-month WTI swap and same-month Dubai crude swap has averaged minus $2.65/b to date in March, on course to register the narrowest monthly discount since minus $1.99/b in April 2018, according to Platts data.

The spread averaged minus $3.08/b in February, minus $4.71/b in January and minus $5.38/b in 2019, Platts data showed.

In addition, the outright price spread between WTI MEH (Magellan East Houston) on a CFR Asia basis and the UAE's flagship light sour Murban crude on an Asia delivered basis has averaged 92 cents/b to date this year, sharply higher than minus 6 cents/b in 2019, Platts data showed.

South Korean refiners will likely continue shifting focus to Persian Gulf barrels as major Middle Eastern producers sweeten their offers in Asia following the breakdown in OPEC+ negotiations for deeper production cuts earlier this month.

Saudi Aramco made a bold move to set a strong foothold in the Asian market for the upcoming trading cycles. The company earlier this month slashed its official selling price differential for April-loading Arab Light crude bound for Asia by $6/b to minus $3.10/b against the average of Platts Dubai assessments and DME Oman futures.

It was the biggest month-on-month cut on record for the Arab Light OSP differential for Asia, according to Platts data.

South Korean refiners paid an average outright price of $70.25/b for US crudes imported in January, more than the average $69.93/b paid for Saudi crudes received during the same period, latest data from state-run Korea National Oil Corp. showed.

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