With the Strait of Hormuz sealed for an extended period by the war between the United States and Israel and Iran, Korea's refining industry is struggling because it cannot bring in Middle Eastern crude. Refiners are holding on for now by borrowing stockpiled oil from the government, but because they will have to return the borrowed oil later at high prices, there is an outlook that petroleum product prices, currently being suppressed, will eventually rise further.
According to the refining industry on the 15th, with the Strait of Hormuz blockade lasting more than a month, the four domestic refiners (SK Innovation, S-Oil, GS Caltex, HD Hyundai Oilbank) have applied to the government for stockpile swaps and are using temporary volumes. Of all the crude Korea imported last year, 70% was from the Middle East, and most of it crossed the Strait of Hormuz, but the route has been blocked by the Middle East crisis.
A stockpile swap is a system in which a refiner that has run short of crude borrows oil from the government's reserves and pays it back later. If a refiner proves it has secured alternative crude from a region other than the one made difficult to traverse by the Strait of Hormuz blockade, it can receive Middle Eastern crude from the government's stockpiles. The refiner first produces petroleum products with government reserves and later returns the oil to the government when the alternative crude arrives.
According to the Ministry of Trade, Industry and Resources, refiners applied this month to swap 17 million barrels from the stockpile, of which 8.38 million barrels have already been transferred to each refiner. Applications for swaps next month have been tentatively tallied at 15 million barrels. Strategic reserves directly managed by the Korea National Oil Corporation (KNOC) total 1 billion barrels, and some volumes are being transferred to each refiner in swap form.
Domestic refiners are barely hanging on by borrowing government reserves. Refinery plants run 24 hours a day as processes such as crude separation and refining proceed continuously. If operations stop once, it takes time to restart, disrupting supplies of petroleum products used across industries. As a result, refiners must keep plants running, even by borrowing government reserves before crude runs out.
The countries from which domestic refiners have decided to bring in alternative crude total 17. The four refiners secured 46 million barrels of alternative crude this month and 72 million barrels in May. The Ministry of Trade, Industry and Resources finds that the four refiners secured the most alternative crude from Saudi Arabia. They are also said to have purchased large volumes of U.S. crude, where spot transactions are active.
Because domestic refining facilities have been built to suit Middle Eastern crude with a high share of heavy, high-sulfur grades, bringing in Middle Eastern crude is most advantageous. In designing the stockpile swap, the government allowed refiners to exchange Middle Eastern crude from government reserves even if they bring in crude from other regions.
The problem is expense. As Dubai crude, the benchmark for Middle Eastern prices, has surged, prices for West Texas Intermediate (WTI) and Brent also soared to as high as $110 per barrel this month. On top of a war premium, loading disruptions have made actual transaction prices even higher. Compared with the day before the United States and Israel struck Iran (Feb. 27), as of the 15th, Dubai crude rose 43%. Over the same period, WTI and Brent jumped 36% and 30%, respectively.
There also remains the matter of post-settlement for government reserves. If a refiner brings in a crude other than Middle Eastern grades, it must settle the price difference with the government by applying the spot price in addition to the base lending fee. Dubai crude is currently higher than WTI and Brent. If the alternative crude is not Middle Eastern, there is a high likelihood the refiner will have to pay additional expense to the government later.
The refining industry expects domestic petroleum product prices to rise as higher-priced crude comes in. An official at a refiner said, "The projected losses each company is identifying keep growing," and added, "For now, the government is suppressing domestic gasoline and diesel prices through a maximum oil price system, but refiners will eventually raise distribution prices for petroleum products after reflecting costs such as stockpile repayment."