Sluggish refinement to increase again, Oil refining industry expected recovery in 2Q
Park Jung Il | comja77@ | 2018-05-11 10:53:05

The refining industry, which had been sluggish in the first quarter, is expected to revive in the second quarter.

Despite of the global oil price hike and economic downturn amid the US withdrawal from the Iranian nuclear agreement and the announcement of economic sanctions, refining margins are on the rise due to increased demand amidst seasonal demand.

According to industry sources on May 10, the refining margins in Singapore, where the domestic refinery industry has set a benchmark for petroleum products sales, rose USD 0.3 to USD 6.7 per barrel as of the end of last week.

Refining margins are margins minus crude oil and other raw material costs, such as gasoline and diesel, which have the biggest impact on oil refineries` profitability.

Combined refining margins this year have dropped to USD 5.9 in early January. However, it remained steady at USD 7 in February and March, and then dropped back to USD 6.1 in April.

It can achieve stable earnings considering the fact that about USD 4 is a break-even point for oil refineries.

According to the industry, refining margins were 7.1 dollars when domestic oil refineries recorded record-high earnings last year. As a result, domestic refiners` earnings, which had been sluggish in 1Q, are expected to turn upward again. S-Oil`s 1Q operating profit fell 23.4% YoY in 1Q and GS Caltex fell 52.0% YoY because of a drop in inventory valuation gains due to the drop in international oil prices at the beginning of the year. SK Innovation, which is expected to announce earnings on Aug 15, is expected to have an operating profit of 800 billion won, which is 20% less than the same period of the previous year.

However, earnings should improve in 2Q on the back of rising refining margins.

The industry expects that the petroleum product market, such as gasoline, will enter the high season and profitability of petroleum products will increase as kerosene and diesel stocks in major markets such as the US, Europe and Singapore fall to the bottom of the year.

Meanwhile, the possibility of a surge in international oil prices due to US sanctions on Iran is a variable but unlikely. Senior economist Lee Jae-seok of the Korea Energy Economics Institute said, "The oil price seems to reflect the nuclear agreement." In fact, on the New York Mercantile Exchange (NYMEX) on May 8 (local time), the West Texas Intermediate crude oil (WTI) for June delivery fell USD 1.67, or 2.4 %, to USD 69.06 per barrel.

By Park Jung Il comja77@

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