Refiners in South Korea, the world’s fifth-largest crude oil importer, have stepped up spot purchases this year, buying at prices depressed by an oil glut as they run their plants at high rates to catch strong processing margins.
With the Organization of the Petroleum Exporting Countries (OPEC) and other producers keeping crude taps open in spite of soft global demand growth, tens of millions of unbought barrels have built up in floating storage sites and dragged down international oil markets.
Still, the profit earned on turning a barrel of Dubai crude into fuel have held at $7.50-$9 a barrel this year – well above annual averages since at least 1997 – as crude benchmarks dipped to multi-year lows, sparking consumer demand for gasoline and naphtha.
“Refining margins are firm thanks to rising demand triggered by weak oil prices, which has supported higher throughput rates and spot purchases have increased to cover them,” said a senior source at SK Trading International, owned by SK Innovation which also owns the largest South Korean refiner SK Energy.
Spot crude purchases by South Korean refiners over January-May rose to 32 percent of the total, up from 26 percent for the same period a year ago and greater than the five-year average, according to data from state-run Korea National Oil Corp (KNOC) and Reuters calculations.
With the refiners taking many of the spot barrels from producers in the Middle East, this has hampered efforts to diversify South Korea’s crude sources to include a greater percentage of oil from West Africa, Latin America and Russia in order to improve the security of its energy supplies.
Even with the market flooded with cheap spot crude from other producers, South Korea increased its Middle East purchases to 85 percent of the total over the first five months of the year, up from 82 percent a year earlier.
Refining sources attributed the rise to guaranteed quality and shorter shipping distances.
The same trends are being seen in other markets as Asian buyers are attracted to the cheap spot prices. In India, the third-biggest crude importer, refiners have cut volumes from long-term contracts with Middle East suppliers to switch to West African oil.
Taiwanese refiner Formosa Petrochemical Corp has increased its spot crude buys to 50 percent of total purchases this year, compared with 30 percent last year, a source familiar with the matter said.
Spot purchases by Japan are also on the rise because of the favourable prices, industry sources there said.
More Spot to Come
Three of South Korea’s four refiners are increasing spot crude imports from Middle East producers such as Iraq and the United Arab Emirates, as well as from Nigeria, Ecuador and Russia, according to refining sources and KNOC data.
“The market is favourable,” said a Seoul-based official with one of the refiners. “The portion of spot barrels is likely to rise further by the end of this year.”
Refiners have been running at high rates to profit from the cheaper crudes, with throughput at South Korean refineries jumping to 90 percent of capacity in May, up from 85.9 percent a month ago and 78.4 percent a year ago, according to KNOC data.
South Korea imported 2.8 million barrels per day over January-May, up 13 percent from the same period last year.