OPEC inaction signals pain for Asian refiners

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OPEC inaction signals pain for Asian refiners

OPEC’s failure to address oil’s slide to near $70 a barrel by refraining to cut its output target threatens profits at Asian refiners that filled inventories at higher prices.

Brent crude plunged the most in three years yesterday after the Organization of Petroleum Exporting Countries said it will keep its collective production at 30 million barrels a day. South Korean refiner SK Innovation predicted its fourth-quarter earnings will be hurt as a 38 percent fall in prices since a June peak widens losses from stockpiles.

While a fall in crude cuts raw material costs for refiners, the benefits are limited because they have to account for oil accumulated when the market was higher. OPEC’s decision not to reduce output creates potential for further declines in prices, according to Goldman Sachs Group.

“The operating environment for the country’s refining industry is expected to worsen in the short-term,” SK Innovation said in an email response to questions. “The loss coming from inventories is forecast to continue with the falling oil prices since the second-half of this year, negatively impacting the company’s fourth-quarter earnings.”

Losses on the value of inventories increase by 8 billion yen ($67.7 million) every time Dubai crude drops by a dollar, JX Holdings, the parent of Japan’s largest refiner, said in a Nov. 4 statement. The estimate was based on the company’s forecast at the time that the Middle East oil grade will average $95 a barrel and the yen will trade at 105 against the U.S. currency during the October-March period.

Dubai crude has averaged $81.78 a barrel since the start of October, while the yen has traded at about 112 per dollar, compiled data show.

Brent crude traded near a four-year low as OPEC braced for a price war with U.S. shale producers after taking no action to reduce a supply glut. The 12-member group, which pumps about 40 percent of the world’s oil, wants a fair price and isn’t “sending any signals to anybody,” said Secretary General Abdalla El-Badri.

Crude has collapsed into a bear market amid the fastest pace of U.S. production in three decades and signs of weakening global demand. Brent was trading down 1.5 percent at $71.47 a barrel on the London-based ICE Futures Europe exchange at 3:19 p.m. Friday in Singapore.

“While falling oil prices are good, inventory losses due to the sharp fall is worrisome,” said H. Kumar, the managing director of India’s Mangalore Refinery and Petrochemicals. “We are preparing an action plan to bring down our inventory levels to the bare minimum. We, like most other Indian refiners, hold about 15-18 days of inventories.”

Indian Oil Corporation, the country’s biggest refiner, posted a 18.97 billion rupee ($306 million) loss on inventories in the second quarter, the company said. Japan’s JX Nippon Oil & Energy Corporation on Nov. 4 forecast inventory valuation losses of 70 billion yen for the year ending March 31.

“Because of the fall in crude prices, there are inventory losses,” said Taiwanese refiner Formosa Petrochemical Corporation spokesman Lin Keh-yen. “These inventory losses are unavoidable, we have no choice but to bear with them and find ways to manage them.”

OPEC’s decision to cede no ground to rival producers underscored the price war in the crude market and the challenge to U.S. shale drillers.

The 12-nation Organization of Petroleum Exporting Countries kept its output target unchanged even after the steepest slump in oil prices since the global recession, prompting speculation it has abandoned its role as a swing producer. “We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC,” said Mike Wittner, the head of oil research at Societe Generale in New York. “It’s huge.”


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