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S Korea's March US crude imports surpass 10 mil barrels as Middle East OSPs rise

Highlights

At least three VLCCs expected to arrive per month in Q2, Q3

Middle East prices seen expensive, Brent premium rises

Refiners hopeful for Iranian oil trade resumption

Singapore — South Korea's US crude imports in March surpassed the 10 million barrel/month mark for the first time in almost a year, as local refiners gradually favor North American barrels over Persian Gulf supply due to the extended uptrend in the Middle Eastern official selling prices, while the sharp rise in the Brent-Dubai price spread makes US supply attractive for Asian buyers.

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South Korea imported 1.448 million mt, or 10.61 million barrels, of US crude in March, up 22.1% from February and the highest monthly shipment since 14.83 million barrels imported in April 2020, latest data released by the Korea Customs Service showed.

On a year-on-year basis, however, US crude imports in March were down 19.9%, marking the eleventh consecutive decline.

Asia's fourth biggest oil consumer had been aggressively cutting back on US crude imports since the late second quarter of 2020 as local refiners were reluctant to buy high volumes of the light and middle distillate-rich crude grades including WTI Midland and Eagle Ford due to dismal domestic demand for gasoline, diesel and especially jet fuel amid the prolonged coronavirus pandemic.

Still, around 11 million barrels of US crude that arrived in March indicate the shift in refinery feedstock procurement and arbitrage trading mindset for major South Korean refiners as Middle Eastern prices look expensive, while domestic and regional middle distillates demand slowly improves amid easing movement restriction measures, said a market research analyst at Korea Petroleum Association.

South Korea is expected to import at least three VLCCs, or around 6 million barrels, of US crude on average per month over the second and third quarter of 2021, according to refinery feedstock trading managers and market analysts in Seoul surveyed by S&P Global Platts.

Major OPEC producers, including Saudi Arabia, Kuwait, Iraq and the UAE have demonstrated strong commitment to production curbs over the past several quarters. Reflecting the tight supply condition, the Platts benchmark Dubai price structure and Middle Eastern crude OSPs have been trending sharply higher in 2021.

Earlier in April, Saudi Aramco raised official selling prices for all its Asia-bound crude grades for loading next month. The May OSP differentials against Dubai/Oman for Arab Light crude was raised by 40 cents, while Arab Medium and Arab Heavy were each hiked by 50 cents from April levels.

In the previous trading cycle, Saudi Aramco had beaten market expectations by raising the April official selling price differential for its Arab Super Light crude to $2.35/b, the highest since August 2020, when it was set at $2.65/b against Platts Dubai and DME Oman, Platts data showed.

Reflecting the tight Middle Eastern supply and expensive OSPs, South Korea's crude imports from its top supplier Saudi Arabia in March fell 22.9% from a year earlier and down 18.3% from February to 2.64 million mt, or 19.35 million barrels, the customs data showed.

In total, South Korea imported 9.62 million mt, or 70.51 million barrels, of crude oil in March, down 16.2% on the year.

Wide Brent-Dubai spread

The current wide Brent-Dubai price spread also makes US crude an attractive feedstock option, light sweet crude and condensate trading managers at two major South Korean refiners said.

"South Korean refiners typically buy North American crude on Dubai pricing basis because that's the benchmark many Asian buyers are comfortable with. US crude suppliers mostly offer their cargoes in the Asian market on Dubai basis too, so the current wide Brent-Dubai spread makes US crude more attractive than North Sea, Mediterranean and West African light sweet grades," said a trader at battery maker SK Innovation.

The Brent/Dubai EFS -- a key indicator of Brent's premium to the Middle Eastern benchmark -- averaged $3.06/b to date in April, on course to set the highest monthly average since $3.34/b in November 2019, Platts data showed.

In addition, South Korea may seek more light sweet US crudes over the coming trading cycles as some refineries look to raise their gasoline production yield if the Asian product cracks remain strong and regional motor fuel demand continues to pick up, the Korea Petroleum Association analyst said.

The FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures averaged $6.86/b to date in April, the highest monthly crack spread since averaging $6.97/b in February 2020, Platts data showed.