Asian refiners have long developed an immunity to geopolitical tensions in the Middle East. The current conflict between Iran and Israel has so far not caused significant shortages or disruptions in crude supplies to Asia. The security of supply from the Persian Gulf remains crucial, but many key players in Asian refining believe that the escalating tensions will not harm oil flows to the region.
According to feedstock management and trading sources in Thailand, South Korea, Taiwan, Japan, and China, East Asia adopts a largely neutral geopolitical stance. This neutrality deters both Iran and Israel from disrupting trade flows, as such actions could compromise Asia’s geopolitical stability and potentially lead to Asian military intervention.
Perspectives of Asian Refiners
Iran has threatened to retaliate by attacking key Middle Eastern energy infrastructure if the United States or its allies engage militarily in its conflict with Israel, according to a military statement aired on state television on October 1st. However, it is highly unlikely that Israel and Iran will escalate tensions to the point of causing major disruptions in crude supplies to the Far East. Such actions could prompt the intervention of major Asian military powers, jeopardizing the region’s geopolitical neutrality.
An analyst in crude and condensate markets at a Singapore-based integrated Japanese trading company said, “Asia’s top four crude importers [China, India, South Korea, and Japan] are also the region’s four largest economies and rank among the top ten global military and naval powers… This is something that both Iran and Israel are likely well aware of.”
Importance of Middle Eastern Oil in Asia
Middle Eastern sour crudes remain essential staples for East Asia’s refining industry. Diplomatic and military-level interventions from East Asia would be inevitable if the region’s economy were seriously threatened by significant disruptions in oil supplies and trade flows, according to refinery feedstock managers in China, South Korea, and Japan.
A trading and inventory manager at a state-run Chinese refiner said, “If China ever faces any serious oil import flow disruption, I highly doubt Beijing will just sit and do nothing… Very tough measures will be taken, such as military actions.”
Import Strategies and Security
Although China’s crude imports from Saudi Arabia have declined this year due to refiners’ strong preference for cheaper Russian and Iranian barrels—often disguised as “Malaysia-origin” cargoes—Asia’s top crude buyer continues to rely on the Middle East for more than half of its overseas crude procurement. The market share of Middle Eastern crude in China’s total import basket remained at 54% for the January-August period, the latest data from the General Administration of Customs showed.
Refining Operations in Japan
While many international shipping operators and Asian refiners seeking to secure deliveries of west of Suez crude grades largely continue to avoid the Red Sea due to the risk of attacks from Yemen’s Houthi rebels, Japanese refiner Taiyo Oil has indicated that it will continue to lift Saudi Arabian light sour crude from the Red Sea port of Yanbu. Taiyo Oil typically loads Saudi Arabian Super Light crude from Yanbu in the Red Sea and is the only buyer of this grade in Asia, a trading source at the company said.
Adapting to Security Risks
Despite the high security risk, Taiyo Oil is willing to take the chance by using “neutral-flagged” ships to carry the Saudi light sour crude, Taiyo Oil President and CEO Takahiro Yamamoto said on September 9th at the Asia-Pacific Petroleum Conference 2024 organized by S&P Global Commodity Insights. Although Taiyo Oil has diversified its light crude supply sources, particularly in Southeast Asia, and with its strong regional trading partner Petronas, it will not completely cease importing Saudi Super Light crude via the Red Sea maritime route, Yamamoto said.
Japan heavily relies on Middle Eastern crude, being the fourth-largest crude importer in Asia. The country took in 2.19 million barrels per day from Persian Gulf suppliers in the first eight months of the year, accounting for more than 96% of its total crude imports during that period, according to the latest data from the Ministry of Economy, Trade, and Industry.
Assessment of the Oil Market
Platts, part of Commodity Insights, assessed the spread between front-month Platts cash Dubai and same-month Dubai crude swaps at $1.5/b on October 1st, compared to an average spread of $2.02/b in September. The spread is widely known as the Dubai crude market structure and is understood to be a key component in the monthly official selling price calculations of major Middle Eastern producers.
