Asian refiners are poised to reassess and possibly update their 2024 crude slate plan as tensions in the Middle East continue to escalate, with various crude importers in the Far East signaling a possible increase in purchases from the Americas and Africa, refinery feedstock management sources said April 14-15.
Although a majority of refiners and traders in China, South Korea, Japan, India, Thailand, Singapore and Vietnam contacted by S&P Global Commodity insights indicated that chances of Iran blocking the Persian Gulf-Asia oil tanker passage or seizing a large number of Asia-bound crude cargoes are very slim, they would still maintain a cautious approach in fixing their Middle Eastern sour crude logistics, while looking to boost non-Persian Gulf spot cargo purchases.
In Japan, feedstock managers at two major refiners including ENOES and trade sources at a Japanese integrated trading company said that since the country relies heavily on Middle Eastern sour crude, the latest tensions ignited by Iran's attack on Israel is a major feedstock security concern and they would consider reaching out to their regular US crude suppliers and trading firms for a potential increase in spot purchases at least through the next few trading cycles.
"Events like these should seriously kick start supply diversification efforts, perhaps starting off with more US crude buying," said a crude and condensate trader at a Japanese integrated trading firm.
Japan imported around 2.31 million b/d of crude from Middle Eastern suppliers over January-February, making up 94.7% of 2.44 million b/d of total crude oil shipments over the period, latest data from the Ministry of Economy, Trade and Industry showed.
Still, local refiners have been stepping up efforts to diversify their supply sources, mainly by increasing the shipments of light sweet US crude in 2024, with light sweet crude imports from the North American producer in the first two months jumping 58% year on year to 80,560 b/d, METI data showed.
Meanwhile, Asia's biggest US crude buyer South Korea is poised to continue actively purchasing WTI Midland and Mars Blend crude.
"Saudi, UAE, Kuwaiti and other Persian Gulf crude grades would remain South Korea's staple diet but it would be prudent to raise the US or even Mexican crude import portion for the time being," a feedstock and logistics manager at a major South Korean refiner said.
"I would love to see the government provide some sort of incentive or tax benefit [for refiners] to buy non-Middle Eastern crude," a feedstock manager at another South Korean refiner said.
South Korea's Minister of Economy and Finance held an emergency meeting April 14 with senior ministry officials to assess the impact of heightened geopolitical tensions in the Middle East on South Korea's trade and the overall economy and discuss various means to respond to any disruptions in import, export and domestic financial markets.
Thailand, Taiwan fond of US, African crude
Refinery feedstock managers in Thailand and Taiwan echoed South Korean refiners' sentiment as they consider the US the most reliable non-Middle Eastern supply source that could provide each country with as much as 10 million barrels/month, if not more.
Among recent US crude spot deals concluded in Asia, CPC Taiwan was heard to have bought two VLCCs of WTI Midland crude for June delivery at a premium of around $4.25/b to Platts front month Dubai assessments, S&P Global reported previously.
Meanwhile, Thailand imported 129,854 b/d of US crude in February, up 32% from a year earlier, latest Thai customs data showed.
In addition, feedstock sources at refiners in Thailand and Taiwan indicated that they could also explore picking up extra spot cargoes from African suppliers going forward.
Light sweet Angolan crude grades have always been an essential part of Thailand's crude slate and Thai refinery linear programming model feedstock strategy over the past few decades, according to a senior feedstock and logistics manager at state-run PTT.
Although Angolan crude imports have been falling in the past decade, the African producer leaving OPEC could help reverse the trend, the PTT source added.
Meanwhile, Taiwan imported 10,893 b/d from Chad in February, compared with zero cargoes purchased from the African supplier in January as well as the same month a year earlier, according to data from the Ministry of Economic Affairs' Energy Administration.
Supply security over EFS economics
Feedstock management sources in Taiwan, South Korea, Thailand and Japan in particular, indicated that although the current arbitrage economics for light sweet crude purchases from North America and Africa are not entirely attractive as the Brent-Dubai price spread has been steadily trending higher since the fourth quarter of 2023, supply security and diversification of supply sources beyond the Middle East should be highlighted as the top priority.
Supply security should overtake trading economics at least for the near term until tensions in the Middle East subside, according to refinery sources in the four Asian countries.
The Brent/Dubai Exchange of Futures for Swaps spread, a key indicator of Brent's premium to the Middle Eastern benchmark, averaged $1.97/b to date in April, compared with a Q1 average of $1.45/b and Q4 2023 average of $1.05/b, S&P Global data showed.
A stronger EFS makes various sweet crude grades produced in the Americas, North Sea and Africa that are linked to the European benchmark less economical compared with Dubai-linked grades.
"To be fair, considering the very expensive [Persian Gulf-Asia] freight and tanker insurance premiums, the current EFS isn't too bad [for US and African] sweet crude imports," a feedstock manager at a North Asian refiner said.
India, China relatively calm
Although buyers in China and India may not have immediate reasons to worry on supplies, they will be watching the geopolitical developments closely following the heightened tensions in the Middle East.
Asia's top two crude importers have solid trading networks with Russian and Latin American supply sources, while it is highly unlikely that Iran would conduct any actions that would derail its relationship with the two Asian giants, industry and trading sources said.
"Generally speaking, I think the situation is under control," a Beijing-based senior official with a state-owned oil giant said.
China continued to favor Russian crude, with shipments from the non-OPEC supplier hitting a six-month high of 2.3 million b/d in February, accounting for more than 20% of China's total crude inflows in the month, General Administration of Customs data showed.
In addition, China's two new mega-refineries Guangdong Petrochemical and Yulong Petrochemical opted to take Russian ESPO Blend and Venezuelan Merey crude as their staple feedstocks in the early phase of new operations.
Still, many state-run refineries rely on Middle Eastern sour crudes and the Chinese refining industry must stay on their toes, refinery sources said.
"Sinopec's plants don't have many alternatives as the facilities are configured to process crudes from the Middle East, priced against Platts Dubai," said a source with a Sinopec refinery in the southern part of China.
Meanwhile, India has long been slashing Middle Eastern crude and heavily favoring Russian crude so Asia's second biggest crude importer would not be as concerned as East Asian buyers, a trading management source at a state-run Indian refining and upstream company told S&P Global.
Russia continues to be India's primary supplier, contributing to over 35% of India's total crude imports, S&P Global reported previously.
Still, analysts warned India should remain vigilant as Middle Eastern sour crudes remain many refineries' staple feeds.
"Seaborne exports, particularly those in the Persian Gulf and surrounding areas, are vital for the global crude market. Any conflict in this region could disrupt these sea lanes, impacting international trade and raising prices," said Rajat Kapoor, managing director for oil and gas at Synergy Consulting.