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There is no doubt South Korea will struggle if oil flows through
the Strait of Hormuz face any future disruption, even if the
country diversifies away from traditional crude oil suppliers
towards more US crude oil barrels. But data by IHS Markit Commodities at Sea
suggests that South Korea's plan to reduce its reliance on crude
oil carried through the Strait of Hormuz has taken place quicker
than expected. Back in 2017, producers across the Middle East
supplied around 74% of crude oil flows to South Korea, with their
share having dropped to 68% in 2018 and 64% last year. The decline
is only marginally related to the country having avoided any
Iranian barrels after the sanctions imposed by the US, with around
250,000 b/d imported back in 2017.
Meanwhile, South Korea's won, together with other Asian
currencies has felt severe pressure earlier this year, mostly due
to the geopolitical tensions in the Middle East which translated
into concern around future oil prices. The country's heavy reliance
on oil imports from the Middle East caused the won to tumble just
after Iran attacked the US bases in Iraq. There's high risk around
the currency's performance if oil prices increase.
South Korea emerged as the region's major importer of US crude
oil barrels in 2019, a trend expected to last in 2020. The
relationship started in an effort to replace Iranian flows, once
the US decided not to renew the sanction waivers. South Korea has
managed to diversify away from the Middle East Gulf, but there is a
long path ahead.
Lighter and sweeter US crude grades are quite popular in South
Korea. However, the rally in the international crude oil tanker
freight market could act as a threat for the further development of
the route, if the US-Asia arbitrage becomes uneconomical. This was
primarily driven by the sharp spike in VLCC freight rates, after
the US imposed sanctions on COSCO tankers in late September.
Meanwhile, South Korea has refused to send any troops to the
Strait of Hormuz, even if its exposure to the region remains quite
high. The US has been requesting South Korea to contribute by
sending troops to support the US-led coalition against Iran, but
Seoul is in a dilemma as it avoids damaging its trade relations
with Tehran.
Posted 16 January 2020 by Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade, IHS Markit
