Attacks on some of the Middle East’s most important oil transportation routes are creating a new problem for Asian refiners. The Strait of Hormuz remains disrupted, a key Saudi pipeline has been hit, and the Red Sea has become increasingly unreliable, leaving major oil buyers with fewer ways to move crude out of the region.
The consequences could increasingly reach the U.S. oil market. If Middle Eastern supplies remain constrained, refiners across Asia may have to compete more aggressively for crude from the U.S. and other regions. The premium on U.S. crude has already nearly doubled from the equivalent of about 0.7 cent a gallon last month to as much as 1.4 cents a gallon, according to industry data cited in South Korea.
South Korea offers an early indication of when that pressure could intensify. The country has enough crude lined up to cover most of its needs through September and October, but local refiners typically arrange purchases and shipments about two months before the oil reaches their plants. That means disruptions taking place now could begin affecting physical supplies in November.
The concern is not simply whether South Korea runs short of oil. Korean refiners also produce gasoline, diesel and other petroleum products for export. If they are forced to pay more for crude or have difficulty securing enough supply, the effects can spread into an international fuel market already facing higher prices ahead of winter.
The situation has become more difficult than it was when the Middle East conflict first disrupted oil flows in March. At that time, the main concern was passage through the Strait of Hormuz. Other transportation routes offered oil producers and refiners alternatives.
Those alternatives are now under pressure.
On Sept. 10, a major Saudi pipeline carrying crude from the kingdom’s eastern oil producing region to the Red Sea port of Yanbu was attacked, disrupting a route that can be used when Hormuz is difficult to navigate.
Conditions in the Red Sea have also deteriorated as Iran aligned Houthi forces maintain control over parts of Yemen’s coastline and threaten shipping through the region.
An industry official said the current environment is more difficult than it was in March because alternative routes are also being targeted. That leaves refiners facing higher costs as they search for replacement supplies and transportation options.
South Korean refiners have strong incentives to keep their plants running even when crude becomes more expensive. Stopping production would not only reduce domestic fuel output but also mean giving up revenue from exports of gasoline, diesel and other refined products.
Prices are already reflecting the strain.
According to Petronet, the petroleum information service operated by Korea National Oil Corp., South Korea’s state run oil company, Dubai crude traded at $3.04 a gallon on Sept. 15. Brent crude was at $2.59 a gallon and West Texas Intermediate was at $2.52 a gallon.
Gasoline traded at $3.36 a gallon and diesel at $4.62 a gallon. Prices for both crude and refined fuels were around or above the averages recorded during the intense phase of the Middle East conflict in March and April.
The immediate situation in South Korea remains manageable. The government says the amount of crude secured for September and October equals about 90 percent of imports during the same period last year.
November is the greater concern.
Because refiners normally arrange crude purchases and shipping roughly two months before arrival, today’s reduced availability and higher transportation costs are likely to become more visible in shipments scheduled for late fall.
Much depends on how quickly Saudi Arabia can restore normal operations on the damaged pipeline.
The Saudi government has not disclosed the extent of the damage or announced when full operations will resume. Market activity has so far been supported by crude that had already reached Yanbu and by existing inventories.
Yaniv Shah, a crude oil market analyst at Rystad Energy, a Norway based energy research firm, said the relatively limited initial price reaction suggests traders believe Saudi inventories can support exports in the short term. He said conditions could change quickly if the disruption extends beyond the roughly five to seven days that stored supplies are expected to provide a buffer.
A longer shutdown would increase the importance of crude produced outside the Middle East.
That is where the U.S. becomes more directly exposed to the shift. Higher Asian demand for American crude could benefit U.S. producers and exporters by strengthening overseas demand, but it could also increase competition for barrels and keep upward pressure on crude prices.
The timing adds another complication.
The Northern Hemisphere is entering a period when agricultural harvesting increases diesel consumption and colder weather begins lifting demand for heating oil. Refiners could therefore be searching for more expensive replacement crude at the same time global demand for some of their most important products is strengthening.
South Korea is considering additional measures to help refiners diversify their sources of crude. Industry officials said the government is discussing whether to expand support programs that had previously been reduced.
The Ministry of Trade, Industry and Energy, the South Korean government agency responsible for energy policy, held an emergency meeting after the Saudi pipeline attack and said it would continue monitoring developments in the Middle East while using policy measures to maintain stable crude supplies.
South Korea may have enough crude to avoid an immediate supply shock. The larger issue is what happens if the Middle East’s main oil route and its alternatives remain disrupted into the fall. In that case, November could bring a broader scramble among Asian refiners for crude produced elsewhere, increasing the importance and potentially the price of U.S. barrels just as winter fuel demand begins to rise.
