Asian refiners are indeed in a critical position, re-evaluating the adequacy of their emergency crude reserves in the face of rapidly escalating geopolitical tensions in the Middle East. The recent U.S. strikes on Iranian nuclear facilities on June 22, followed by Tehran’s threat to close the Strait of Hormuz, have intensified these concerns, prompting refiners across Asia to prepare for potential disruptions in their crucial Middle Eastern crude deliveries.
Different Approaches
In Japan, three major refiners, including ENEOS, have indicated that they might need to add anywhere from 5 million to 40 million barrels of crude oil to their emergency stocks. This potential increase is a precautionary measure in case the critical maritime passage of Middle Eastern sour crude to the Far East faces severe disruption. As of the end of March, Japan’s total petroleum reserves stood at approximately 449.47 million barrels, providing enough supply for 247 days of domestic consumption.
Similarly, in South Korea, at least two major private refiners located in Ulsan have reported that their existing emergency stocks of crude oil and oil products are sufficient to maintain minimum operational levels and meet basic commercial fuel needs for at least 220 days. Feedstock management sources at these refiners informed Platts (part of S&P Global Commodity Insights) that refinery operation executives are now evaluating the necessity of extending these reserves to last more than 300 days.
Regarding state reserves, South Korea currently holds 99 million barrels of strategic reserves, which is equivalent to about 116.5 days’ worth of domestic demand. This aligns with the recommendation from the International Energy Agency, according to the energy ministry and Korea National Oil Corp.
In contrast to Japan and South Korea, Chinese refiners appear to be adopting a more relaxed approach. As Asia’s largest oil consumer, China reportedly holds plenty in its inventory. An official from a state-owned oil giant confirmed that China’s crude stocks are at “comfortable levels,” and Chinese refiners can access these commercial stocks to offset pressure from rising oil prices.
Normal Business
Despite the heightened regional tensions, traders in Singapore with direct knowledge of daily spot and term Middle Eastern sour crude and oil product flows to East Asia confirm that cargoes from the Persian Gulf are currently loading without any disruptions. A sense of caution prevails, but Asian traders broadly estimate a greater than 50% likelihood that the Strait of Hormuz will remain open.
Concerns persist regarding navigation difficulties and the risk of accidents in the area, particularly due to electronic interference. However, there are no current indications of changes to loading schedules or a rush among buyers to expedite their shipments, according to sour crude traders based in Singapore.
As a feedstock and logistics manager at South Korea’s S-Oil aptly put it, “Both Israel and Iran have been seriously damaged… why would they make matters worse by making more enemies by disrupting crude supplies and trade flows to East Asia?” Traders, analysts, and refinery sources across Asia believe that both Iran and Israel are likely to avoid harming commercial tankers bound for the Far East. This stems from a recognition that major East Asian economies like China, South Korea, and Japan all rank among the world’s top ten military powers, and any disruption to critical sour crude flows could trigger military responses from these nations, who would be significantly impacted.
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Source: S&P Global
