South Korea braces for oil supply disruption

South Korea is mulling over plans to release its strategic oil reserves in case of a disruption in supply, a senior finance official said on Tuesday. (Shutterstock)
Updated 17 September 2019

South Korea braces for oil supply disruption

  • The oil refinery industry is on high alert over potential fallout from the drone attacks on Saudi oil processing installations

SEOUL: South Korea is mulling over plans to release its strategic oil reserves in case of a disruption in supply, a senior finance official said on Tuesday.

The move follows attacks on oil processing facilities in Saudi Arabia — Seoul’s top oil supplier. 

“The strikes on major oil facilities in Saudi Arabia have intensified concerns about growing instability of international oil prices,” Kim Yong-beom, vice minister of economy and finance, said in a meeting with key economy and finance officials in central Seoul. 

“The government is vigilant about potential risks that could affect national economy and will brace for any risk.”

The vice minister anticipated, however, that the Saudi supply disruption would not have an impact on the South Korean oil supply in the short-term. 

That’s because the country imports oil from Saudi Arabia under long-term contracts, and the Kingdom has vowed to prevent problems in its supply of crude oil through its reserve oils, he said.

“We’re closely watching the situation and preparing for alternatives in case the risks in the Middle East are prolonged and intensify,” Kim said.

To that end, the government could release strategic oil reserves in an effort to stabilize supply and demand, he added. 

As of 2018, the combined oil reserves held by the South Korean government and local refiners came to 200 million barrels.

“We will also seek alternative suppliers in cooperation with local oil refiners if necessary,” he said.

Last year, South Korea imported 323 million barrels of crude from Saudi Arabia. The figure accounts for nearly 30 percent of its total oil imports, according to the Korea Petroleum Association.

The oil refinery industry is on high alert over potential fallout from the drone attacks on Saudi oil processing installations.

After the attacks, Saudi Arabia shut down about half of its oil production on Saturday, which the Saudis said will affect 5.7 million barrels. Crude prices surged by nearly 20 percent, the biggest jump in almost three decades.

Analysts expect a surge in crude prices is inevitable in the short-term.

“Saudi Arabia and the US are preparing to release oil reserves, so I believe there will not be supply disruptions in the long-term,” Han Yoon-ji, an analyst at Shinhan Investment Corp told Arab News. 

“Even if they release reserves, it can’t prevent speculative buying prompted by political unrest in the region, which is likely to push up oil prices.”

South Korean oil refiners believe there will not be a significant supply disruption despite a short-term price hike.

S-Oil Corp., which gets most of its crude from No.1 shareholder Saudi Aramco, said that a supply disruption is unlikely since oil reserves from the oil firm are stored in countries such as the Netherlands and Japan.

“We do not expect to see a supply disruption,” an S-Oil official, requesting anonymity, said without elaborating.   

A spokesman of SK Innovation Co., South Korea’s biggest refiner added: “It’s likely that oil prices will surge in the short-term, but we’ll have to assess how that will affect our business.”

Refiners said they are carefully assessing the impact of a crude price hike on their refining margins. Usually, South Korean refiners generate profit if the refining margin stays above at least $4 per barrel.

A rise in crude prices not only increases the cost of purchasing crude, but also raises the prices of petroleum products and improves crude inventory values, which may help their earnings hike.

However, industry sources believe the situation now is not all good for the refiners because the crude price hike this time is because of supply problems and not due to an increase of demand.

Oil falls below $57 on virus impact and OPEC+ delay

Updated 19 February 2020

Oil falls below $57 on virus impact and OPEC+ delay

  • Contagion ‘is spooking market players,’ analysts say after Asian shares fall and Apple issues warning

LONDON: Oil fell below $57 a barrel on Tuesday, pressured by concerns over the impact on crude demand from the coronavirus outbreak in China and a lack of further action by OPEC and its allies to support the market.

Forecasters including the International Energy Agency (IEA) have cut 2020 oil demand estimates because of the virus. Though new cases in mainland China have dipped, global experts say it is too early to judge if the outbreak is being contained.

Brent crude was down 82 cents at $56.85 a barrel in mid-afternoon trade after rallying in the previous five sessions. US West Texas Intermediate crude fell 70 cents to $51.35.

“Risk aversion has returned to the markets,” said Commerzbank analyst Carsten Fritsch.

“OPEC+ has shown no sign yet of reacting to the virus-related slump in demand by making additional production cuts.”

The virus is having a wider impact on companies and financial markets. Asian shares fell and Wall Street was poised to retreat on Tuesday after Apple said it would miss quarterly revenue guidance owing to weakened demand in China.

“This has spooked market players and triggered a sharp pullback in risk assets,” said Tamas Varga of oil broker PVM.

The IEA last week said that first-quarter oil demand is likely to fall by 435,000 barrels per day (bpd) from the same period last year in the first quarterly decline since the financial crisis in 2009.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, have been considering further production cuts to tighten supply and support prices.

The group, known as OPEC+, has a pact to cut oil output by 1.7 million bpd until the end of March.

The next OPEC+ meeting next month is set to consider an advisory panel’s recommendation to cut supply by a further 600,000 bpd. Talks on holding an earlier meeting in February appear to have made no progress, OPEC sources said.

As well as OPEC+ voluntary curbs, support for prices has come from involuntary losses in Libya, where output has collapsed since Jan. 18 because of a blockade of ports and oilfields.