Will Korea’s oil supply run dry?

Concerns surrounding limited oil supply and rising prices rocked Korea’s refinery industries Tuesday after the United States decided not to extend sanctions waivers on Iranian oil imports.

The United States announced Monday that it would not reissue exemptions, given last November and due to expire in May, for eight countries importing Iranian oil as part of its sanctions efforts against the Middle Eastern country to curb its nuclear program.

In response, Dubai crude oil prices rose 3.2 percent to $73.36 per barrel on Monday according to the Korea National Oil Corporation (KNOC) as concerns on disruption to the oil supply heightened.

Korea relies on Iranian oil.

According to the Korea Petroleum Association (KPA), Iran was the third-largest exporter of crude oil to Korea in 2017. Korea cut back last year, importing only 58.2 million barrels compared to 147.9 million barrels in 2017, data from KNOC showed.

Analysts on Tuesday warned local petrochemical industries to be careful.

“Bans to cheap Iranian condensate leads to concerns of tight supply and rising prices as Iranian condensates would be replaced with products from other regions,” said a report by Samsung Securities on Tuesday.

Iran’s condensate prices were $1.2 lower than equivalent products from Qatar on Monday.

Quarterly operating profit for refiner Hyundai Oilbank could decline by 5.9 percent and S-Oil by 3.2 percent if condensate prices rise by $1, according to the report.

Iranian oil-condensate products are important for Korean businesses due to their superior quality and lower cost. In the first quarter of 2018, 51 percent of all oil-condensate imports to Korea were from Iran. Condensate is used to produce naphtha, a raw material to create plastic.

Analysts say that global oil prices could rise further if conflict between the United States and Iran escalates.

In response to Washington, a senior Iranian military official warned that Iran could close the Strait of Hormuz, used by much of the world’s oil supply, according to Iran’s Fars News Agency.

“Iran’s warning on closing the Strait of Hormuz is a factor for rising global oil prices,” said Seo Sang-young, an analyst at Kiwoom Securities. “China, Korea and Japan’s oil imports mostly pass through the strait so it is concerning for East Asian countries.”

“If Iran closes the Strait of Hormuz, it could lead to military action from the United States, so such a move is unlikely,” added Seo.

Meanwhile, Kim So-hyun, an analyst at Daishin Securities, said oil prices could stabilize in the second half of the year.

“Even with sanctions on Iran, it will be difficult for global oil prices to reach last year’s highest point and instead factors suppressing global oil prices will likely increase in the second half of the year,” said Kim citing U.S. requests to major oil exporters to increase production to replace Iranian production.

U.S. Secretary of State Mike Pompeo said it will ensure oil supplies remain stable in cooperation with Saudi Arabia and the United Arab Emirates (UAE) in the Monday announcement.

“We have been working with major oil-producing countries to ensure the market has sufficient volume to minimize the impact on pricing,” said Pompeo. “Both the Kingdom of Saudi Arabia and the [UAE] have assured us they will ensure an appropriate supply for the markets.”

Kim added that the global economic slowdown could play a factor in suppressing prices.

“Furthermore, increased U.S.-shale production and declining demand for crude oil due to the slowing global economy will weigh on global oil prices.”

The Korean government also held an emergency meeting on Tuesday with local petrochemical companies in response to the U.S. announcement.

“[We] request diversifying import channels and acquiring replaceable products,” said Kim Young-rae, deputy minister for trade, at the meeting.

The government said it will support export companies by finding alternative markets to minimize losses.

BY CHAE YUN-HWAN [chae.yunhwan@joongang.co.kr]