Russian Naphtha Stranded, S. Korea Shifts to Mideast Imports

Key Takeaway

• Over 2 million barrels of Russian naphtha stranded at sea as South Korea tightens import scrutiny, up from a weekly average of 790,000 barrels.
• South Korea's probe into naphtha imports in March leads to shunning of Russian products and increased imports from Mideast suppliers.
• Despite sanctions, Russian naphtha flows shift towards China and Taiwan, with Moscow's exports accounting for over half of Taiwan's April imports.

Russian Naphtha Builds at Sea

In a significant shift in global energy trade dynamics, over 2 million barrels of Russian naphtha are currently held in tankers, a stark increase from the weekly average of about 790,000 barrels observed in January and February. This accumulation, particularly noted in the waters near Oman as of May 5, underscores the ongoing impact of Russia's invasion of Ukraine on international markets. Market intelligence firm Kpler highlights this growing hoard, signaling a cautious stance from South Korean buyers amid fears of government scrutiny.

South Korea's Shift in Import Strategy

Traditionally, South Korea has been a major buyer of Russian naphtha, a crucial component for plastics manufacturing. However, the landscape has dramatically changed post-invasion, with South Korean petrochemical makers now avoiding direct imports from Russia and any cargoes of unclear origin. This change in behavior follows a government investigation launched in March into the country's naphtha imports, reflecting a broader trend of import-dependent economies adapting to the geopolitical upheavals and sanctions that have followed the conflict.

Before the conflict, Russia stood as South Korea's top naphtha supplier. Yet, the war's onset saw a pivot in South Korea's import sources, with increased flows from the United Arab Emirates, Malaysia, Singapore, and Tunisia. The investigation into potential re-labeling of Russian naphtha has further pushed South Korean buyers towards suppliers from Kuwait and Oman, as noted by Kpler analyst Viktor Katona.

Global Market Realignments

The invasion of Ukraine has not only disrupted traditional trade routes but also introduced a complex web of sanctions and price caps, reshaping global energy markets. While direct imports from Russia to South Korea have dwindled, Russian naphtha has found new destinations, with China and Taiwan seeing expanded flows. Notably, more than half of Taiwan's naphtha imports in April were sourced from Moscow, indicating a significant realignment in global naphtha trade patterns.

South Korean refiners and petrochemical companies, while permitted to import Russian naphtha, must navigate the constraints imposed by the Group of Seven's (G-7) price cap, which restricts access to western services for cargoes exceeding certain price thresholds. Although not a G-7 member, Seoul has aligned with the group's measures aimed at penalizing Russia for its aggression, underscoring the global effort to adapt to the evolving geopolitical landscape.

Street Views

• Viktor Katona, Kpler (Neutral on Russian naphtha flows):

  "Since then, imports from Mideast suppliers — such as Kuwait and Oman — have risen... At the same time, Russian naphtha flows to China and Taiwan have expanded, noting shipments from Moscow accounted for more than half of Taiwan’s imports in April."