S.Korea's oil refining margins exceed break-even points

Refining margins at South Korea’s four oil refiners, led by SK Innovation Co., have exceeded their break-even points after three months, a sign of their margins bottoming out last month.

A sharp reduction in the imports of gasoline, diesel and kerosene from China and the rising demand in the holiday season are fueling hopes of a recovery in their profit margins in coming months.

According to oil refining industry officials, the benchmark Singapore refining margin has been on the rise for three weeks in a row, after hitting $3.8 per barrel in the last week of July.

The margin rose to $6.8 per barrel in the third week of July, up from the previous week’s $5.3.

That compares with $3.9 in the third week of July 2022.

Refining margins are the difference between the prices of oil products and crude oil and serve as a measure of oil refiners’ earnings.

It is the first time the country's oil refiners beat their break-even points of $4 to $5 per barrel since the first week of April.

The steep rise in their refining margins was attributed to delayed shipments from Europe due to the low water levels of the Suez Canal and Germany’s Rhine River on the back of the heat wave and drought.

The prices of all three major refined products -- gasoline, diesel and kerosene – went up.

Holiday travels are fanning the demand for gasoline and diesel, as well as jet fuel, along with the increase in construction projects.

Such demand is expected to drive earnings of the country’s four oil refiners – SK Innovation, GS Caltex Corp., S-Oil Corp. and HD Hyundai Oilbank Co. -- sharply higher in the latter half of this year.

Supported by the upbeat views, shares in SK Innovation closed 11.2% higher at 196,500 won ($153) on Monday. The share price of S-Oil advanced 2.4% to 72,500 won by Monday’s close.

In the first half of 2022, domestic refiners delivered strong results. Their refining margins spiked to as high as $29.5 per barrel last year thanks to dwindling imports in the aftermath of the COVID-19 outbreak and Russia’s invasion of Ukraine.

In a trend reversal, they posted losses of slightly over 1 trillion won ($780 million) combined, in the fourth quarter of 2022.

​Industry observers said the rebound in refining margins would not be short-lived. The sweltering weather will further boost the electricity consumption, amid shrinking oil stock on the back of reduced imports from China and Europe.

“China’s exports of refined oil products have been declining and hit a one-year low last month,” said one of the industry officials.

“Their export volume will unlikely rebound, which will in turn lift domestic refiners’ margins further.”

Political gridlock in Libya, a major oil exporter to Europe, could drive European refiners’ operating rates lower.

On the contrary, the cracking margins of naphtha, the feedstock of petroleum products, remain below the break-even point due to lower demand.

Expectations of an economic recovery in India and China are adding to the optimistic views about South Korean oil refiners, which are expected to run low on stockpiles owing to growing demand from the two countries.

Write to Hyung-Kyu Kim at Khk@hankyung.com
Yeonhee Kim edited this article.