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Refining margins

Crude oil price rebound yet to spill over to Korean refiners

Feb 19, 2021 (Gmt+09:00)

Crude oil prices have rebounded by more than 20% since the start of the year, but their recovering prices have not yet translated into margin improvement at South Korean refining companies.

Battling the prolonged demand slump, Korean refiners, led by SK Innovation Co., are going all out to prop up their margins. They have been reducing their dependence on costly Middle East crude oil and switching to imports from Central and South America.

Further, they are opting to process lower-quality heavy crude oil to save import prices, while bolstering high-value products such as lube base oil.

The price of Dubai crude oil, the benchmark price for South Korean refiners, have risen by 23.7% year to date, according to the Korea National Oil Corp. on Feb. 19. They are now quoted at $63.2 per barrel, compared with $51.1 at the end of last year. Brent crude increased by 23.4% during the same period, with the US West Texas Intermediate (WTI) crude up 24.7%.

Graphics by Jerry Lee
Previously, refiners tended to take advantage of crude oil price rises by passing them to retail prices by a wider margin. Suffering from subdued demand caused by the global pandemic, however, they cannot fully reflect the crude price changes into the consumer prices of gasoline and diesel, which are a big chunk of their business.

So far this month, the benchmark Singapore gross refining margin has edged up to $1.7 per barrel on average, versus $1.4 in January and $1 in December of last year. Despite the slight increase in the refining margin, it stayed far below the breakeven point for Korean refiners.
 
“We can make a profit only when the refining margin comes to $4-$5. But it has remained in the $1 range,” said a refining company official.
Graphics by Jerry Lee
The recent rebound in crude oil prices is attributable mainly to supply shortages in the wake of a recent cold snap in Texas, the largest energy-producing state in the US, as well as a strong earthquake in northeast Japan this month, which led to closures of major refineries. 
 
A crude production cut by Saudi Arabia further worsened the inventory shortages. In January, the world’s largest oil exporter announced a sharp cut in crude production for both February and March in an effort to raise prices. Now Saudi Arabia plans to increase its oil output in the coming months, the Wall Street Journal reported on Wednesday, citing advisers to the kingdom.

“Unless oil demand rebounds sharply to the level of 2019, Korean refiners will unlikely see a significant improvement in their refining margins,” said DB Financial Investment analyst Han Seung-jae.

DIVERSIFYING INTO CHEAPER CRUDE

In search of cheaper crude oil, Hyundai Oilbank Co. has recently imported Castilla Blend, Columbia’s main oil blend. Albeit lower quality, it is more than 10% less expensive than Middle East crude. The company also sharply raised the proportion of Mexico’s Maya crude, which it began importing from 2015.

“We used to sign long-term supply contracts with Middle East crude companies for stable supply, despite their higher prices,” said a Hyundai Oilbank official. “But now we are increasingly opting to sign spot market deals to secure cheaper crude.”

The refiner halved its dependence on Middle East crude to 41.8% last year, from 84.5% in 2016.
Graphics by Jerry Lee
Additionally, Korean refiners are strengthening high-value product lineups beyond transport oil such as gasoline and diesel, in tandem with rising demand.

Last year, S-Oil Corp. earned 426.3 billion won ($386 million) from its lube base oil sales, although the company as a whole swung to a net loss of 1 trillion won.

The refining companies also chose to process the residues from distilled crude oil into petrochemical products to boost earnings.

“The refinery utilization rate tumbled to a historic low last year, but the heavy oil upgrading facilities were run at full capacity,” said another refinery company official.

Facilities for upgrading heavy oil resources account for 20% to 40% of Korean refiners' facilities.

Write to Jae-Kwang Ahn at ahnjk@hankyung.com

Yeonhee Kim edited this article.

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