- High shipping and insurance costs for the Cape of Good Hope route negate discounts on Mediterranean crude, limiting arbitrage trade for Asian refiners.
- Thailand did not import Mediterranean crude in January, while South Korea and Indonesia’s Pertamina have also slowed their purchases.
- Safety concerns over the Red Sea passage persist despite reduced geopolitical tensions, keeping alternative shipping costs high.
Asian refiners that traditionally purchase light sweet crude from the Mediterranean continue to opt for the Cape of Good Hope delivery route over the shorter Red Sea passage, citing safety concerns. However, the increased logistical costs have reduced the attractiveness of Mediterranean crude, even as some grades, like CPC Blend, are being offered at discounts, according to refinery feedstock managers in North and Southeast Asia, according to S&P Global.
Challenges in Arbitrage Economics
The Brent-Dubai benchmark spread has narrowed significantly in recent weeks, and light sweet Mediterranean crude grades are being offered at discounts in the spot market. However, feedstock managers and traders from Thailand, South Korea, and Singapore noted on March 12-13 that the longer Cape of Good Hope route offsets these price advantages due to higher shipping costs.
When asked about the possibility of using the Red Sea route, sources reaffirmed that the Cape of Good Hope remains the preferred option despite inefficiencies, as safety remains the top priority.
Security and Insurance Risks in the Red Sea
Following the Gaza ceasefire agreement between Israel and Hamas, Iran-backed Houthi rebels stated in January that they would only target ships with strong links to Israel. However, they recently renewed threats against Israeli shipping after Israel blocked humanitarian aid to Gaza.
An official from SK Innovation, South Korea’s largest refiner, emphasized that there is no definitive guarantee that tankers can safely navigate the Red Sea, leading to continued reliance on the longer Cape of Good Hope route for CPC Blend and other Mediterranean crudes.
South Korea, which imported an average of 2 million barrels/month of CPC Blend in 2024 and 3.2 million barrels/month in 2023, did not import any of this grade in January, according to data from the Korea National Oil Corporation.
Mediterranean Crude Imports Decline in Asia
According to customs data, Thailand completely halted Mediterranean crude imports in January. The country had previously imported 17,615 b/d of Libyan crude and 7,994 b/d of Azerbaijan’s Azeri Light crude in 2024.
Indonesia’s Pertamina, another major Mediterranean crude buyer, has also slowed purchases, particularly of Azeri Light, which was a key feedstock for its Cilacap refinery. Instead, the company has recently purchased alternative crudes, including:
- Australia’s North West Shelf (NWS) condensate from Chevron for April 4-8 loading.
- West African grades like Angola’s Clov, Nigeria’s Qua Iboe, and Gabon’s Etame.
- Brazilian crude Sururu through a tender that closed on February 10.
The NWS cargo was purchased at a discount of around $3/b to Platts April Dated Brent crude assessments, FOB, which translates to a price above parity with Platts Dated Brent on a CFR Tuban basis, according to market sources.
Outlook on Shipping Costs and Insurance Premiums
Despite a reduction in adverse incidents, the war risk premium (AWRP) for merchant ships passing through the Red Sea remains high at 0.5% of a vessel’s hull and machinery (H&M) value for a seven-day period. Sources from Seoul, Tokyo, and Singapore expect these costs to remain elevated for the foreseeable future.
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Source: S&P Global
