Opinions mixed over cheaper oil

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Opinions mixed over cheaper oil

Following the drop in crude oil prices, Korean refiners’ concerns are deepening due to reduced profit margins, while the airline industry welcomes the dip in hopes of lower fuel costs.

According to data from Korea National Oil Corporation, Dubai’s crude oil price was $79.77 per barrel on Wednesday, falling below $80 per barrel for the first time since Oct. 29, 2010, when the price was $79.86.

The cost of Dubai crude, which represents about 80 percent of Korea’s crude imports, reached $140.70 per barrel in July 2008 - nearly twice as much as the current price. For the past four years, Dubai crude cost more than $100 per barrel, but in September it broke through the $100 barrier, dropping more than $20 in two months.

The situation is no different for the other two benchmark crudes, Brent and WTI (West Texas Intermediate).

In December, a barrel of WTI traded on the New York Mercantile Exchange for $77.19. On Tuesday, at one point, it fell to $75.84, its lowest level since October 2011. It traded at $100 a barrel as recently as July.

Brent, the international benchmark for Europe, was valued on London’s ICE Futures exchange at $82.82 per barrel Tuesday. Earlier in the day it fell to $82.08, its lowest level in just over four years.

Both WTI and Brent’s prices per barrel went up slightly during Thursday’s trading, but are still nearly 30 percent off their peak in June.

And it seems the price decrease for crude is likely to continue. According to the Organization of Petroleum Exporting Countries (OPEC)’s world outlook, demand for crude will fall to 28.2 million barrels a day by the end of 2017, the lowest level since 2004. Last year’s demand was 30.3 million barrels per day.

“Amid the sluggish recovery of the global economy, with countries like China also having a slowdown in growth, the demand for crude shouldn’t be high,” said a Hyundai Research Institute report. “In terms of supply, the production of non-OPEC countries led by the United States will gradually increase and put downward pressure on global oil prices.”

The private think tank said the drop in oil prices could help the local economy by boosting consumption and increasing exports. But for refiners, the fall in crude prices is not good news.

Local refiners, which have been posting poor earnings compared to last year, said the crude price decline results in a loss in their inventory valuation, which affects their balance sheets.

“It takes about 30 to 40 days to purchase crude and sell it to the market after refining, and if crude oil prices drop during this period, we see a loss,” said a spokesman at a major local refiner.

Korea’s big refiners have already reported shortfalls due to the price slump. SK Energy, the No.1 refiner, reported an operating loss of 226.1 billion won ($207 million) in the third quarter, while loss from inventory valuation reportedly accounts for nearly 140 billion won.

S-Oil, Korea’s third-largest refiner that had 186.8 billion won loss in refining business, also had a 71 billion won loss in inventory devaluation due to the crude oil price drop.

However, unlike the petroleum business, companies in the transport industry are happy, as the crude oil price drop leads to savings on fuel costs. For airlines, fuel purchases generally account for about 30 percent to 40 percent of operating cost.

Despite posting a less-than-expected third-quarter operating profit of 65.7 billion won, Asiana Airlines’ shares went up 2.56 percent to 4,400 won on the Kospi yesterday. Korean Air Lines also gained 3.78 percent to close at 38,400 won.

“With the oil price drop, Asiana’s fuel cost in the fourth quarter is expected to be 8 percent lower than last year,” said KTB Investment & Securities analyst Shin Ji-yoon.

The average price of jet fuel in the fourth quarter last year was more than $120 per barrel, but currently it trades at just above $100 per barrel. The report from Kyobo Securities this week said that as crude oil drops by $10 per barrel, KAL is about to see about a 200 billion won increase in operating profit, while Asiana could have a 100 billion won increase.

BY JOO KYUNG-DON [kjoo@joongang.co.kr]

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