South Korean refiners look set to increase North Sea crude purchases at the expense of light sweet US crude imports as the narrow Brent-Dubai price spread lowers the procurement cost of Forties crude, while the North American benchmark WTI remains relatively expensive.
South Korea received 2.057 million barrels of light sweet Forties crude from the UK in May, marking the first North Sea crude shipment since August 2019 when it took 2.024 million barrels, according to the latest data from state-run Korea National Oil Corp.
Asia’s fourth-biggest crude importer also received 1.02 million barrels of ultra-light crude from Norway in May, marking the biggest intake from the European supplier since 1.15 million barrels received in November 2018.
On the contrary, South Korea’s crude imports from the US in May tumbled 35.7% from a year earlier to 7.407 million barrels, which marked the biggest decline since the country began US crude imports, the KNOC data showed.
Asia’s biggest US crude customer is poised to continue cutting crude imports from the North American supplier in the second half of 2020 as South Korean refiners no longer find WTI, Bakken and Eagle Ford grades attractive and competitive, S&P Global Platts reported previously.
Instead, major refiners including SK Innovation and Hyundai Oilbank said any gaps in light sweet crude procurement volumes from the US can be filled by North Sea crude and condensate purchases.
The country’s top refiner SK Innovation used to import an average of around two VLCCs of Forties crude per month during 2018. The company then switched focus to light sweet US crude in 2019 to take full advantage of WTI’s steep discount against Brent and Dubai during the period. However, the prices and arbitrage economics are back in favor of more North Sea crude purchases, a company official told Platts this week.
Hyundai Oilbank also regularly bought Norwegian ultra-light grades including Ormen Lange in 2018 before shifting focus to light-end US grades in 2019. The company also echoed SK Innovation’s sentiment as it finds Norwegian condensate attractive again in recent trading cycles, according to a Hyundai Oilbank official.
South Korea’s combined crude imports from the UK and Norway are estimated at around 5 million barrels in the second quarter and the shipments could reach at least 6 million barrels in Q3, up sharply from 750,000 barrels in Q1 and 730,000 barrels in Q4 2019, according to trading desk managers at major South Korean refiners surveyed by Platts.
Highly sophisticated South Korean refineries are more than capable of cracking medium and heavy sour Middle Eastern and Mexican grades but the companies still require an adequate mix of light sweet crude feedstocks to maximize production of high octane gasoline, as well as clean marine fuels, industry and refinery officials, told Platts earlier.
FORTIES VS WTI ARBITRAGE
Supporting the South Korean refiners’ renewed appetite for North Sea crude, Platts data showed the spread between Forties crude on a CFR North Asia basis and WTI Magellan East Houston, or MEH, on an Asia delivered basis has averaged minus $1.94/b in Q2. The spread flipped to a discount after commanding an average premium of 4 cents/b in Q1 and $1.45/b in Q4 2019.
In addition, Brent’s premium against Dubai has narrowed sharply this year and even flipped to a discount against the Middle Eastern benchmark for the very first time on March 11.
The Brent/Dubai Exchange of Futures for Swaps — a key indicator of Brent’s strength or weakness against the Middle Eastern benchmark — averaged minus $1.09/b in Q2, falling from 41 cents/b in Q1 and $2.93 in Q4 2019, Platts data showed.
The EFS averaged 88 cents/b to date in July but it remains sharply lower than 2019 average of $2.38/b.
A weaker EFS makes crude grades produced in the North Sea that are priced against Brent more attractive than Dubai-linked Persian Gulf grades as well as US crudes.
Many Asian refiners purchase US cargoes on Platts Dubai pricing basis rather than WTI Houston marker since the buyers are already heavily exposed to Dubai prices. Asian crude importers are much more comfortable adopting the Platts Middle Eastern price benchmark for spot trades, refinery officials in South Korea and multiple trading managers based in Singapore told Platts.
Reflecting Brent’s competitiveness, South Korean refiners paid an average outright price of $25.07/b for Forties crude imported in May, less than the average $25.74/b paid for Saudi Arabian crudes imported in the month and $29.86/b for US crude received during the same period, the KNOC data showed.
KNOC’s import cost figures include freight, insurance, tax and other administrative and port charges.