Oil price declines hit Korean refiners hard as profits collapse

Oil companies say their profits will decline in the third quarter on quarter as a global economic downturn starts to weigh on product prices.

Just two months ago, politicians were pushing for a windfall profit tax on these companies to get a piece of their excess profits. In the first half, the combined operating profit of SK Innovation, GS Caltex, S-Oil and Hyundai Oilbank total 12.32 trillion won ($8.59 billion).

Analysts forecast weakness.

SK Innovation's third quarter operating profit, as reported by FN Guide, be 1.11 trillion won, down from 2.32 trillion won in the second quarter. S-Oil is expected to report 874.4 billion won in operating profit in the third quarter, down from 1.72 trillion won in the second quarter.

Unlisted GS Caltex and Hyundai Oilbank are forecast to achieve similar results.

"The results from 2020 and last year were not good due to the decrease in demand caused by the Covid-19 pandemic, and it seems that the forecast for the third quarter was made as it was due to an unusual boom owing to the Russia-Ukraine war in the first half of the year," said an oil industry insider. "However, it is difficult to make the conclusion that the recent external bad news has simply normalized from the super boom in the second quarter."

Singapore's composite refining margin in the third week of September fell to zero.

Refining margin final product prices minus the cost of raw materials. It is a key indicator for estimating the earnings of oil companies. Usually, if it is more than $4 to $5, the refining is considered profitable.

Refining margins were minus $1.64 per barrel on Sept. 15.

This is the first negative refining margin in two years. It remained negative until Sept. 20, reaching a low of minus $2.95 on Sept. 16. The industry cited slowing demand for gasoline as the cause. China increasing its export quota for refined oil such as gasoline by 10 to 15 million tons also had an impact.

Increased oil price volatility is also a negative factor.

"When the oil price rose from $80 to $100 per barrel between the first and second quarters, around 30 percent of oil company operating profit was related to inventory valuation," said an oil industry insider. "If oil prices fall, inventory valuation losses can occur."

The price of Dubai crude oil was $84.25 on Tuesday, the lowest in the second half of this year, according to the Korea National Oil Corporation. For oil companies that import crude oil in dollars, the fall in the won is also a factor.

BY CHOI EUN-KYUNG [lim.jeongwon@joongang.co.kr]