February 24, 2020 / 8:02 AM / a month ago

S. Korea's thirst for U.S. crude to keep growing in 2020

* U.S. crude $1.70/bbl cheaper than Saudi crude in 2019

* Freight rebates, FTA help reduce U.S. crude costs

* Record output, OPEC cuts, IMO 2020 to buoy U.S. crude

* S. Korea buys WTI, WTI Midland, Eagle Ford crudes - data

By Jane Chung

SEOUL, Feb 24 (Reuters) - South Korea is on track to overtake Canada as the top buyer of U.S. crude oil in 2020 as a mix of steep price discounts to alternative supplies, attractive refining economics and rebates on shipping charges prove too good to resist for big refiners.

South Korean purchases more than doubled in the first 11 months of 2019 from a year earlier to 142.3 million barrels, Energy Information Agency (EIA) data showed. That was by far the fastest growth rate among top destinations for U.S. crude, and placed South Korea less than 10 million barrels behind top market Canada.

With the United States set to become a net exporter of crude for the first time in 2020, Asia is expected to be a focus for more shipments, especially as European refiners have limited capacity for more shale.

Historically attractive pricing has been a key driver behind U.S. export momentum.

South Korea, the world’s fifth-biggest oil importer, bought more than 375,000 barrels per day (bpd) of U.S. oil in 2019, taking its share of Korean imports to nearly 13%. Buyers paid on average $1.70 a barrel less than for crude from top supplier, Saudi Arabia, according to Reuters calculations based on state-run Korea National Oil Corp (KNOC) data.

This compares with a 97 cents a barrel premium in 2018.

“It is economically more attractive, and trade companies, midstream (firms) and producers have been aggressive seeking out buyers for American crude in Asia,” said Stephen Wolfe, a Houston-based oil analyst at Energy Aspects.

“Light sweet (crude) is attractive in Korea as a substitute for Iranian South Pars, especially in petrochemically-integrated plants, and especially after the implementation of IMO 2020 (ship fuel rules).”

QUALITY FUEL

U.S. crude oil is normally more expensive for Asian buyers than Middle East grades due to longer journey times and the fact that it yields more quality fuels at a lower refining cost.

Light sweet crude contains more naphtha, used in petrochemicals, and also has a lower sulphur content, making it suitable for very low sulphur fuel oil, which has been mandated for shipping since the start of 2020.

“The U.S. WTI crude discount against Dubai crude was steep last year,” said Cho Sang-bum, an official at the Korea Petroleum Association that represents refiners.

“As Middle East crude OSPs (official selling prices) are high because of OPEC supply cuts, we expect U.S. crude to keep coming.”

South Korean importers have also benefited from government rebates on freight charges, worth about $2.11 a barrel, for diversifying supplies beyond the Middle East. And U.S. oil imports attract a zero tariff under a free trade agreement with Washington, Cho said. Middle East crudes carry a 3% tariff.

MORE TO COME

“We expect (U.S. crude) imports to expand again this year,” said Suh Suk-won, chief executive of SK Trading International, a unit of SK Innovation , which owns top refiner SK Energy, pointing to falling freight rates and increased marine fuel production.

In the first quarter, U.S. crude shipments to South Korea are estimated to be 38.57 million barrels, up nearly 20% from a year earlier, Refinitiv data showed.

West Texas Intermediate (WTI), WTI Midland and Eagle Ford crudes have been among the most popular U.S. grades in South Korea, along with medium sour Mars crude, KNOC data showed.

“These barrels are going to continue to move and it’s going to be OPEC’s problem. They hate it because shale’s breakeven price is below the general breakeven price for OPEC,” said a U.S. crude exporter, who declined to be named.

One wild card is the level of Chinese imports of U.S. crude following a U.S. trade deal. South Korea could benefit if the coronavirus outbreak means China does not increase its U.S. crude oil imports despite a tariff cut, said Energy Aspects’ Wolfe.

“Korea could negotiate better prices as more American production makes its way into Asia.”

($1 = 1,206.9100 won)

Reporting by Jane Chung; additional reporting by Devika Krishna Kumar in New York; editing by Gavin Maguire and Richard Pullin

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