Refiner prospects improve as margins rebound

Things are looking up for local oil refiners in the second half as refining margins recover from a record low.

Refining margins are the difference in value between the products produced by a refinery and the value of the crude oil used. Last week, refining margins in Singapore - the benchmark for profitability among Asia’s oil processors - recovered to the $6 per barrel level for the first time since September last year.

During a difficult 10-month period, refining margins plummeted to as low as $2 per barrel in January. The break-even-point for local oil refiners is considered to be around $4.50 per barrel.

The low profitability was a big blow to refiners’ performance and is expected to dramatically pull down second-quarter profits for Korea’s four largest refiners - SK Innovation, S-Oil, GS Caltex and Hyundai Oil Bank.

Yet with the margin jumping back up, analysts predict that the second quarter could be a turning point. The rise of refining margins to $6 per barrel last week is a fast jump from last month - in early June the figure was around $3 per barrel.

“The business environment surrounding refineries is going through a positive change,” said Kang Dong-jin, an analyst at Hyundai Motor Securities. “The IMO 2020 will pull up demand. In production costs, Middle East countries losing ground will have a positive effect.”

Most analysts agree that the margin increase will continue through August. July and August are “driving seasons,” when diesel demand shoots up as more people spend time driving for vacations or to enjoy the summer.

A more fundamental factor behind the moving margin is global oil refiners having slowed down factory operations to cut down supplies when margins were low. In particular, Chinese oil refiners, which once led the market’s oversupply, cut down production. The country’s diesel exports in May dropped 52 percent on year while gasoline exports were down 27 percent on year that same month.

In terms of global oil supply, a weaker dominance of Middle Eastern countries is another positive factor analysts cite will maintain a higher refining margin. Crude oil pipelines in the United States are expected to start commercialization in the year’s third quarter, pulling down dependence on Middle Eastern oil, analysts say.

Another upcoming factor is the IMO 2020. The International Maritime Organization is tightening regulations on ship fuel’s sulfur content from January. According to Daniel Lee, an analyst at Korea Investment & Securities, the IMO 2020’s effect will start months earlier as ships will move to secure low-sulfur fuel at least three months before sailing.

Contrary to the rosy outlook, some analysts doubt that the recent margin hike will last until the end of the year. Chinese oil refiners may have cut production for now, but the improving margins may motivate them to increase production again.

“Generally speaking, readjusting factory operation rates takes around two months, so we can say the refining margin recovery will continue on through August,” said Hwang Kyu-won, an analyst at Yuanta Securities.

BY SONG KYOUNG-SON [song.kyoungson@joongang.co.kr]