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South Korean refiners to embrace Saudi crude amid market uncertainty

Highlights

Overall crude imports down in 2020, but Saudi oil purchases rise

US crude imports fall for fifth consecutive month in September

Refiners to cap run rates as domestic fuel demand remains weak

Singapore — South Korea would heavily favor Saudi crude oil over US or other arbitrage barrels for the rest of the year as local refiners find their staple medium sour Middle Eastern crude to be the most viable and economical feedstock option in times of volatile refining margins and tepid consumer fuel demand.

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South Korea made rigorous efforts to diversify its crude import sources over the past several years, with the share of Middle Eastern crude in its yearly procurement basket falling below 71% in 2019, compared with more than 85% in 2015.

However, Asia's fourth biggest oil consumer made a U-turn on its refinery feedstock diversification strategy in 2020.

South Korea's crude imports from Saudi Arabia in September climbed 8.3% from a year earlier at 23.1 million barrels, according to data from state-run Korea National Oil Corp. released Oct. 26.

The country's overall crude imports over January-September fell 7.8% year on year at 744.13 million barrels, but its Saudi crude imports rose 3.7% during the first nine months at 238.66 million barrels.

The low oil price environment and volatile refined product cracks prompted South Korean refiners to increasingly return focus to Middle Eastern crude, the feedstock that the companies are most comfortable with, said trading managers at SK Innovation, GS Caltex and Hyundai Oilbank.

As South Korean refiners continue to take the more safe and familiar feedstock procurement options in times of heightened market uncertainties, there's little room to explore arbitrage barrels, according to a market research manager at Korea Petroleum Association based in Seoul.

The country was Asia's biggest US crude customer in 2019. However, South Korean refiners imported 8.267 million barrels of US crude in September, down 34.4% from a year earlier and marking the fifth consecutive monthly decline, the KNOC data showed.

TRADING ECONOMICS

South Korean refiners are expected to continue to embrace Saudi crude in the coming trading cycles as Saudi Aramco maintains relatively attractive official selling prices.

Middle Eastern producers have been seen regularly cutting their monthly OSPs in 2020 and the attractive Persian Gulf OSPs appealed to many refiners grappling with tepid refining margins since the COVID-19 outbreak, the trading managers told S&P Global Platts.

South Korean refiners paid an average outright price of $43.82/b for Saudi crude imported so far this year, sharply lower than $53.91/b paid for the shipments from the US, $45.83/b from Mexico and $50.53/b from Kazakhstan, the KNOC data showed.

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

"Light sweet US crude used to come cheaper than Saudi or any other Middle Eastern crude oil despite WTI's superior quality, but that's no longer the market condition nowadays," a feedstock manager at GS Caltex said.

In 2019, South Korea paid on average $65.17/b for crude shipments from the US, cheaper than an average of $66.87/b paid for Saudi crude cargoes received in the year.

Apart from Saudi oil, imports from the UAE in September also jumped 49.6% year on year at 5.562 million barrels, the KNOC data showed. Abu Dhabi crude grades that South Korean refiners typically purchase are light sour Murban crude and medium sour Upper Zakum, the trading managers with direct knowledge of the matter told Platts.

CRUDE RUNS, STOCKPILES

South Korean refiners and condensate splitters processed 76.616 million barrels of crude in September, down 12.3% from 87.329 million barrels a year ago, following a 9% decline in July and August and a 4.7% drop in June, the KNOC data showed.

The drop in crude processed comes as local refiners have lowered run rates to cope with weakening refining margins and tumbling demand of oil products, according to a KNOC official.

The country's top refiner SK Energy has shut its No. 3 crude distillation unit with a capacity of 170,000 b/d since late September, earlier than the original maintenance schedule, a company source told Platts.

The source declined to provide details on when SK Energy will restart the unit, but indicated that maintenance is likely to be longer than usual as the refiners are seeking to keep their crude run rates lower amid the COVID-19 pandemic.

As a result of the drop in crude processing, South Korea's crude stockpiles fell 11.3% year on year at 44.924 million barrels as of end-September.