Saudi Arabia sharply cut the price of crude it sells to Asia, but some expect it will take time for oil prices in Korea to fall. That is because tankers carrying crude are still using a detour around the Strait of Hormuz, which was blocked by the U.S.-Iran war, adding to freight expense burdens, and because several factors that affect prices, including a cap on petroleum product prices, are also in play.
According to the refining industry on the 8th, state-run oil company Aramco cut the official selling price (OSP) for August Asia-bound Arab Light by $11 per barrel from the previous month. It was the biggest cut in 26 years.
Arab Light is the product Korean refiners import the most. Most refining facilities in Korea, Japan and China are designed to be suitable for processing this grade.
With this decision, the August price of Arab Light is set to be supplied at a discount of $1.5 per barrel to the average price of Dubai and Oman, the Asia benchmarks. Compared with July, when a premium of $9.5 was added to the benchmark price, the cut is being called a steep discount.
Many interpret Aramco's sharp August price cut as aimed at not losing Asian clients, considered "big spenders." Korea imported a total of 1.03 billion barrels of crude last year, and supplies from Saudi Arabia accounted for the largest share at 34.2%.
However, as the Strait of Hormuz was blocked by the U.S.-Iran war, imports of U.S. crude increased rapidly. According to the Korea National Oil Corporation (KNOC), as of April this year, imports of U.S. crude (16,787,000 barrels) even surpassed Saudi volumes (15,946,000 barrels). It was the first time on a monthly basis that U.S. crude imports exceeded those from Saudi Arabia.
A refining industry official said, "Although traffic through the Strait of Hormuz is gradually resuming following the U.S.-Iran cease-fire agreement, oil demand in Asia has decreased," adding, "We see Aramco's sharp price cuts as aimed at protecting its market share."
Still, the domestic refining industry expects it will be difficult for petroleum product prices to drop quickly, even though the procurement cost of Saudi crude has fallen sharply. Final import prices are calculated by comprehensively reflecting oil prices by country and continent, freight tables, and various incidental expense items, so there are still many factors to consider.
The biggest variable is the changed logistics environment. Because traffic through the Strait of Hormuz has not fully resumed, crude carriers for Korean refiners are using detour routes. Refiners say the burden of higher freight remains large and will offset the impact of the OSP cut. It also takes more than a month from crude purchase to transport and input into refining lines.
The price-setting structure for petroleum products in Korea must also be considered. Typically, retail prices at domestic gas stations and refiners' supply prices are linked to the Singapore oil products Mean of Platts Singapore (MOPS). Even if the OSP falls, MOPS may not move.
Since March, Korean refiners have been supplying products at a government-set cap under the petroleum product price ceiling system, regardless of fluctuations in international spot prices. Some say that even if crude procurement costs fall, refiners will not quickly lower domestic sales prices in order to recoup losses they have shouldered under the price ceiling.
Meanwhile, the refining industry is focusing on discussions over making up losses after the price ceiling system ends. The government has set aside 4.2 trillion won in funding to compensate refiners for losses from the ceiling. But as prosecutors recently indicted the four major refiners on collusion charges, an unexpected variable has emerged in calculating the losses.
A Ministry of Trade, Industry and Resources official said, "For now, separate from the prosecutors' investigation, we plan to proceed with the loss-compensation process for the price ceiling as planned."