South Korean and Japanese refiners are increasingly attracted to Iraqi crude oil as official selling prices for Basrah crudes fell to steep discounts against other Persian Gulf grades, prompting the Northeast Asian end-users to pick up additional Iraqi barrels to cater to their rising refinery run rates and winter fuel requirements.
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Iraq's State Oil Marketing Organization, or SOMO, cut November official selling price differentials by 40-50 cents/b across its Asia-bound Basrah crude grades. The cuts were on on top of the $1.20-$1.50/b reduction in OSPs announced over August-September.
As a result, major Northeast Asian refiners indicated that OSP spreads between Iraqi crude and other Persian Gulf grades have fallen sharply, making Iraq's flagship Basrah Light and Basrah Heavy crudes very attractive.
The OSP spread between Basrah Light and Saudi Arabia's Arab Light dropped to minus 85 cents/b for cargoes loading in November, a sharp decline since the Iraqi medium sour grade commanded a premium of 15 cents/b to the Saudi oil for cargoes loaded in March, S&P Global Platts data showed.
South Korean refiners are especially keen to take full advantage of the competitive prices in order to replenish their depleted crude stockpiles and serve their fast rising refinery run rates, trading and operation sources at two major South Korean refiners told Platts.
The country's overall crude imports are on course to recover to pre-pandemic levels over the coming quarters as major refiners including SK Innovation, Hyundai Oilbank, S-Oil Corp. and GS Caltex raise run rates to lift transportation fuel production, with the government aiming to shift to a phase of living with COVID-19 starting Nov. 9.
The country's top refiner SK Innovation, which had kept its crude run rate under 70% since early last year, has recently raised its crude run rate to mid-70%, a company official said.
GS Caltex, which operates four CDUs with a combined capacity of 800,000 b/d, has also raised its crude run rate to over 90% recently, according to refinery officials and operation sources.
Among recent spot trades, SK Innovation's refining subsidiary SK Energy was heard to have bought 2 million barrels of November-loading Basrah Heavy crude at a premium of around $1/b to the grade's OSP, Singapore-based market sources and sour crude traders with knowledge of the deals said. SK Energy declined to comment on the deals due to the sensitive nature of corporate trading relationships.
Japan's winter fuel demand
With a cold winter on the anvil, Japanese refiners continue to seek lighter crude grades for kerosene production, though rising premiums of some Middle Eastern grades may have prompted Basrah imports, a sour crude trader based in Singapore with close knowledge of Persian Gulf-Japan spot deals said.
Japan typically favors Abu Dhabi's Murban crude, with Asia's third biggest crude importer taking on average 15 million-20 million barrels of the light sour crude on a monthly basis, according to latest data from the Ministry of Economy, Trade and Industry.
However, with Murban crude OSP and spot price differentials seen rather expensive, major Japanese refiners have started to pay attention to competitive Basrah crude, with a few November-loading Basrah Light cargoes heard sold to Japan's ENEOS at premiums of around 70 cents/b to the grade's OSP, trading sources in Singapore with knowledge of the deals told Platts.
Basrah crude is also an ideal feedstock for fuel oil production, which could also serve power utilities well during winter, feedstock managers at ENEOS and Fuji Oil said.
While Japanese power utilities were procuring fuels for normal winter weather, some were preparing supply contingencies, market sources said.
One option is to use fuel oil, or increase the use of oil by power utilities as an alternative to LNG amid soaring prices, a source with a Japanese refiner said.
Most regions in Japan were forecast to experience either a 30-year-average, or below average temperatures over December-February, according to the Japan Meteorological Agency's winter weather forecast released Sept. 24.
Spot price support
Reflecting the healthy Northeast Asian refinery demand, Platts assessed prompt-month Basrah Light crude at a premium of 70 cents/b to the grade's OSP Oct. 19, a sharp rally since a discount of 5 cents/b assessed on Oct. 12.
Compared to previous months when large volumes of Basrah crude were available on the spot market weighed on the spot price differentials, limited availability this month has also sparked a revival for the Iraqi grade, market sources said.
A wider Brent-Dubai spread also discouraged refiners to seek alternatives from the Middle East, slowing the flow of arbitrage crude from the West that are priced against the European benchmark.
At the Asia close Oct. 19, the December Brent-Dubai Exchange of Futures for Swaps, or EFS, was assessed at a premium of $4.06/b, compared with 82 cents/b at the end of 2020, Platts data showed.