SEOUL: South Korea is mulling over plans to release its strategic oil reserves in case of a disruption in supply, a senior finance official said on Tuesday.
The move follows attacks on oil processing facilities in Saudi Arabia — Seoul’s top oil supplier.
“The strikes on major oil facilities in Saudi Arabia have intensified concerns about growing instability of international oil prices,” Kim Yong-beom, vice minister of economy and finance, said in a meeting with key economy and finance officials in central Seoul.
“The government is vigilant about potential risks that could affect national economy and will brace for any risk.”
The vice minister anticipated, however, that the Saudi supply disruption would not have an impact on the South Korean oil supply in the short-term.
That’s because the country imports oil from Saudi Arabia under long-term contracts, and the Kingdom has vowed to prevent problems in its supply of crude oil through its reserve oils, he said.
“We’re closely watching the situation and preparing for alternatives in case the risks in the Middle East are prolonged and intensify,” Kim said.
To that end, the government could release strategic oil reserves in an effort to stabilize supply and demand, he added.
As of 2018, the combined oil reserves held by the South Korean government and local refiners came to 200 million barrels.
“We will also seek alternative suppliers in cooperation with local oil refiners if necessary,” he said.
Last year, South Korea imported 323 million barrels of crude from Saudi Arabia. The figure accounts for nearly 30 percent of its total oil imports, according to the Korea Petroleum Association.
The oil refinery industry is on high alert over potential fallout from the drone attacks on Saudi oil processing installations.
After the attacks, Saudi Arabia shut down about half of its oil production on Saturday, which the Saudis said will affect 5.7 million barrels. Crude prices surged by nearly 20 percent, the biggest jump in almost three decades.
Analysts expect a surge in crude prices is inevitable in the short-term.
“Saudi Arabia and the US are preparing to release oil reserves, so I believe there will not be supply disruptions in the long-term,” Han Yoon-ji, an analyst at Shinhan Investment Corp told Arab News.
“Even if they release reserves, it can’t prevent speculative buying prompted by political unrest in the region, which is likely to push up oil prices.”
South Korean oil refiners believe there will not be a significant supply disruption despite a short-term price hike.
S-Oil Corp., which gets most of its crude from No.1 shareholder Saudi Aramco, said that a supply disruption is unlikely since oil reserves from the oil firm are stored in countries such as the Netherlands and Japan.
“We do not expect to see a supply disruption,” an S-Oil official, requesting anonymity, said without elaborating.
A spokesman of SK Innovation Co., South Korea’s biggest refiner added: “It’s likely that oil prices will surge in the short-term, but we’ll have to assess how that will affect our business.”
Refiners said they are carefully assessing the impact of a crude price hike on their refining margins. Usually, South Korean refiners generate profit if the refining margin stays above at least $4 per barrel.
A rise in crude prices not only increases the cost of purchasing crude, but also raises the prices of petroleum products and improves crude inventory values, which may help their earnings hike.
However, industry sources believe the situation now is not all good for the refiners because the crude price hike this time is because of supply problems and not due to an increase of demand.