South Korea's Oil Lifeline Holds Until November as Even Pipeline Routes Close Off
With crude oil from the Middle East now blocked on both sea and land transport routes, South Korean refiners are bracing for a scenario in which they cannot secure crude from December onward. According to the International Energy Agency (IEA), traffic through the Strait of Hormuz, which normally carries around 20 million barrels per day, has come to a near standstill since the U.S.-Iran war began in March, and Saudi Arabia's 1,200-kilometer overland pipeline, built as a bypass, has also been halted by a recent drone attack. U.S. and Saudi officials believe the attack was carried out by Iran-backed armed groups in Iraq.
The situation in the Red Sea has also deteriorated. Yemen's Iran-aligned Houthi militants seized the port city of Mokha on the Red Sea coast on the 10th, then captured Perim Island in the Bab el-Mandeb Strait the following day. The strait is the maritime gateway connecting the Red Sea and the Gulf of Aden; if it is blocked, ships must take the long detour around Africa's Cape of Good Hope.
Because crude is typically contracted two to three months in advance, volumes contracted in July and August, along with existing inventories, will keep arriving through October and November, leaving short-term supply unaffected for now. Middle Eastern countries that can export crude without passing through Hormuz include Oman, which borders the Arabian Sea directly, and the United Arab Emirates, which can use the port of Fujairah. However, given that cargo passing through Hormuz accounts for a quarter of global oil consumption, the two countries' bypass networks alone cannot fill the supply gap.
Procurement costs are snowballing. Freight rates have already surged. Charter rates for very large crude carriers (VLCCs) on the Middle East-to-China route recently climbed to nearly $760,000 per day, an all-time high 26 percent above the peak reached during the Hormuz crisis in March. VLCC rates from Oman to China also jumped 144 percent in a month to $358,201 per day. War risk insurance premiums have risen to as much as 10 percent of cargo value.
Supplies of refined products such as diesel are also being shaken. According to the IEA, Gulf nations' net exports of diesel and gas oil averaged 390,000 barrels per day in August this year, a quarter of pre-war levels. Russia's output and exports of refined products are also declining as Ukrainian attacks on Russian refining facilities continue. The IEA analyzed that the simultaneous drop in supply from the Middle East and Russia means bottlenecks in the market for middle distillates such as diesel could become more severe than for crude.
The oil market's buffers are also being depleted rapidly. Global oil inventories now stand at 507 million barrels.
