MOSCOW (MRC) -- 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, according to S&P Global.
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.
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 USD43.82/b for Saudi crude imported so far this year, sharply lower than USD53.91/b paid for the shipments from the US, USD45.83/b from Mexico and USD50.53/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 USD65.17/b for crude shipments from the US, cheaper than an average of USD66.87/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.
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.
As MRC reported earlier, SK Global Chemical, a subsidiary of SK Innovation, plans to shut down its production processes for ethylene and ethylene propylene diene monomer (EPDM) within its naphtha cracking center in Ulsan, South Korea. The 200,000-t/y naphtha cracker, which started commercial operation in 1972, and the EPDM unit, which began commercial operation in 1992, will be mothballed from December 2020 to shift the company's focus to high-value added chemicals.
Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).
According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 1,496,500 tonnes in the first eight months of 2020, up by 5% year on year. Shipments of all ethylene polymers increased, except for linear low desnity polyethylene (LLDPE). At the same time, PP shipments to the Russian market reached 767,2900 tonnes in the eight months of 2020 (calculated using the formula - production minus exports plus imports - and not counting producers' inventories as of 1 January, 2020). Supply increased exclusively of PP random copolymer.