SEOUL/SINGAPORE (Reuters) - South Korea’s purchases of U.S. oil and gas this year will hold to the rapid pace set in 2018, likely narrowing its trade surplus with the world’s top economy further and bolstering its ties to Washington.

FILE PHOTO: An employee holds a gas pump to refill a car at a petrol station in central Seoul April 6, 2011. REUTERS/Lee Jae-Won

South Korea is expected in January and February to import at least 18 million barrels of crude oil and 900,000 tonnes of liquefied natural gas (LNG) from the United States, according to trade flow data from Refinitiv Eikon.

That’s a four-fold increase on oil from a year earlier and a slight drop on LNG, indicating the record U.S. crude and LNG volumes heading into South Korea in 2018 are set to continue, supported by favorable market conditions brought about by increasing oil and gas output in the United States.

The jump in South Korea’s U.S. oil and gas imports comes as U.S. President Donald Trump continues to push to reduce trade deficits with the United States’ major trading partners by selling more to them than it buys. U.S. oil and LNG exports are a key part of this strategy.

“At the moment, the trend (of importing U.S. crude) will stay ... The economics for U.S. crude is a little bit better than Middle East and North Sea oil,” said a South Korean refining source who declined to be named due to company policy.

Record U.S. crude oil and LNG volumes flowed into South Korea in 2018, while supplies from the Middle East were tightened amid OPEC-led output cuts and a re-imposition of U.S. sanctions on Iran.

The United States was South Korea’s sixth-biggest crude supplier last year, its highest ranking ever as it overtook Iran and Russia. It also became South Korea’s third-largest LNG supplier, while South Korea was the top importer of U.S. LNG.

South Korea’s U.S. oil and gas imports more than quadrupled in value to $6.75 billion in 2018 from $1.5 billion in 2017, according to the country’s customs data.

The U.S. oil import value of $4.5 billion alone was more than six times the $725 million taken in U.S. oil in 2017.

“Buying more U.S. oil and gas was part of (Seoul’s) strategy as our wide trade surplus against the United States was grounds for revising the Korea-U.S. free trade deal,” said Je Hyun-jung, director at the Korea International Trade Association.

South Korea’s 2018 trade surplus with the United States at $13.86 billion was the lowest since 2011, down 22.4 percent from $17.86 billion a year earlier, the customs data showed.

In 2017, Trump threatened to renegotiate or scrap what he called a “horrible” bilateral trade deal that had doubled the U.S. trade deficit with South Korea since 2012.

The two countries agreed to revise the deal last year, with Seoul capping its steel exports to the United States to avoid hefty tariffs and giving greater market access to U.S. carmakers. The revision took effect on Jan. 1.

Tilak Doshi, a Singapore-based analyst at consultancy Muse, Stancil & Co, said improving trade ties between South Korea and the United States will also support their shared goal of North Korea’s denuclearisation.

“Any help from the United States regarding North Korea is critical, so good trade relations will help. It also helps South Koreans to protect their exports to the United States by pointing to their (U.S.) energy imports,” Doshi said.





AMERICA VS MIDDLE EAST

South Korea imports nearly all of its energy. It is the world’s fifth-largest crude and third-largest LNG importer, typically taking 80 percent of its oil and more than 40 percent of its LNG from the Middle East.

In 2018, as U.S. oil flows grew, though, the Middle East’s share of South Korean crude imports dropped to 73.5 percent, the lowest since 2002.

While it’s not certain freight rebates for non-Middle East crude imports - part of South Korea’s diversification push - will continue, higher U.S. crude output and wider discounts for West Texas Intermediate (WTI) will make U.S. oil attractive to South Korean buyers looking for cheaper sources outside their traditional suppliers.

GS Caltex, South Korea’s No.2 refiner, bought 10 million barrels of U.S. crude, mainly WTI Midland and Mars, for arrival over January-February, said a company spokesman, as U.S. oil has became more price competitive.

South Korea’s hunt for condensate to replace Iranian supplies is also expected to intensify later this year as waivers from U.S. sanctions start to expire in May.

South Korea buys U.S. oil mostly on a spot basis. It buys U.S. LNG primarily on a long-term basis via a 20-year term contract that state-run Korea Gas Corp (KOGAS) has with Cheniere.

Two South Korean private power companies - GS EPS and SK E&S - are also set to take U.S. LNG from 2019 and 2020, respectively, under their own 20-year contracts with Cameron LNG and Freeport LNG.

U.S. LNG’s share of South Korea’s energy mix will grow as the Asian importer switches away from nuclear and coal to renewables and LNG for power, said Tim Boersma, director of Global Natural Gas Markets at Columbia University’s Center on Global Energy Policy.

“The Korean decision to put more emphasis on LNG as a fuel of its future may well continue, given the growing role of U.S. companies in this market,” Boersma said.