Diversifying away from Middle East oil harder than it looks

South Korea's share of crude imports from the Middle East, which had been declining as the country sought to diversify its supply sources following regional conflict, rebounded in May. The uptick was largely the result of emergency logistics measures by the government that temporarily boosted volumes. But with the United States recently resuming airstrikes against Iran and abruptly revoking a sanctions waiver on Iranian crude, uncertainty over Middle East oil supplies has deepened once again — keeping the push to diversify import sources firmly on the agenda.

According to the latest supply-and-demand statistics from the Korea Petroleum Association released Wednesday, South Korea imported a total of 72.823 million barrels of crude in May, down 22.9 percent from a year earlier. Although overall import volumes fell, the Middle East's share rose to 54.1 percent — up about 3.7 percentage points from 50.4 percent the previous month. Middle Eastern crude imports totaled 39.419 million barrels in May, a 21.4 percent increase from April, while non-Middle Eastern crude edged up just 4.3 percent to 33.404 million barrels. Notably, imports of American crude — which had been driving the diversification trend — fell 10.5 percent month-on-month to 15.02 million barrels.

The Middle East's share of South Korea's crude imports had once stood close to 70 percent before the regional conflict intensified, only to fall to around 50 percent in April. The rebound in May is attributed to the government's emergency risk management efforts and geographic factors.

May import volumes typically reflect cargoes loaded in April, given a transit time of three to four weeks. "When Middle East risk was at its peak in April, presidential chief of staff Kang Hoon-sik traveled to Saudi Arabia and the United Arab Emirates as a special envoy for strategic economic cooperation, conducting emergency negotiations to proactively secure alternative shipping routes and vessels — and that appears to have translated into higher import volumes in May," an industry official said. May imports from Saudi Arabia reached 18.839 million barrels and from the UAE 13.151 million barrels, up 18.1 percent and 22.2 percent respectively from the previous month.

The drop in American crude imports, by contrast, reflects longer transit times. "The government pursued diversification on all fronts, but routes from the Americas involve far greater physical distances than the Middle East, meaning shipping takes considerably longer," the same official said. "As a result, Middle Eastern cargoes arrived first in May, while American crude may have shown a temporary statistical decline due to the lag in delivery and logistical constraints." A clearer picture of the trend, the official added, will emerge once June import data becomes available.

Structural limitations within the refining industry also make it difficult to rapidly reduce dependence on Middle Eastern crude. "As the emergency situation partially eased, there was an element of scaling back the American crude volumes we had temporarily increased and restoring flows from existing suppliers," a refinery official said. "Even though South Korea's refining facilities are among the most sophisticated in the world, they are fundamentally optimized for the heavy crude grades from the Middle East, and lighter crudes like those from the United States can result in lower production efficiency." The official added that the astronomical costs of retooling facilities, combined with existing production and sales plans, make it far from easy to sharply cut Middle East crude imports in the short term.

Analysts say it is difficult to predict how the Middle East's share of crude imports will trend going forward. Even though supply appears adequate for now — partly due to production increases by OPEC and its allies in the OPEC+ grouping — geopolitical tensions have not been fully resolved.

Uncertainty stemming from the Middle East is rising again, particularly after the United States resumed airstrikes against Iran following a tanker attack in the Strait of Hormuz. The US Treasury Department's Office of Foreign Assets Control announced Tuesday (local time) that it was revoking a 60-day temporary general license — issued June 21 — that had permitted the production, delivery and sale of Iranian crude oil. The move reversed, after little more than two weeks, a sanctions exemption on Iranian crude that had been granted while the United States and Iran conducted follow-up negotiations under a memorandum of understanding on ending hostilities.

"Going forward, transit risks in the Strait of Hormuz, whether Iran imposes passage fees, and trends in maritime insurance premiums will all combine to affect oil prices and import costs," a Korea Petroleum Association official said. "Given the chronic geopolitical instability in the Middle East, the need to diversify crude import sources will persist."