S-Oil
Amid rising oil prices, the supply burden from China (in play since Sep 2022) is now easing. Moving ahead, demand for fuel oil for transportation is expected to improve, and refining margins should remain solid.
Expect solid refining margins, centering on transportation fuels such as gasoline and jet fuel
The Dubai crude price fell to US$70 on Mar 20, but rose again to US$85 on Apr 6 alongside both an easing of banking risks in the US and the announcement of additional production cuts by OPEC+. Diesel refining margin recorded US$17 on Apr 6, down to a level not that far from the average diesel margin of US$15 over 2010~2019 before the outbreak of Covid-19. While centering on Europe, countries preemptively stocked up diesel inventory, there was no seasonal demand growth during the winter season due to the warmer-than-expected weather.
Meanwhile, gasoline refining margins remain robust. China has greatly expanded its petroleum product exports since Sep 2022, but its export volume of petroleum products in 2023 is on the decline. Declining gasoline export volume is highlighted, as it appears that the demand for travel following the re-opening jumped immediately. Jet fuel and kerosene refining margins are set to improve alongside gradually strengthening air passenger demand.
After the outbreak of Russia-Ukraine War, the total supply of Russian petroleum products fell by 20% (Jan 2022 vs Feb 2023). Europe’s portion of Russia’s total exports of petroleum products narrowed from 60% in Jan 2022 to 9% in Feb 2023. Europe looks in need of a new source of procurement in the near future. Given the limited capacity of the US to expand supply, Europe’s dependence on Asian petroleum products will likely amplify.
1Q23 Preview: Top show q-q turn to profit with OP of W508bn
For 1Q23, we expect S-Oil to post consolidated OP of W508.0bn (TTP q-q; OPM of 5.3%).
[Refining] We see 1Q23 OP of W288.3bn (TTP q-q; OPM of 3.7%). Although there were likely inventory valuation losses due to falling oil prices in 1Q23, we believe that the scale of such losses dropped sharply q-q. Favorable forex rates (won appreciation against the dollar) and a lowered Official Selling Price (OSP) also likely contributed to earnings improvement. [Chemical] We estimate OP of W6.6bn (TTP q-q; OPM of 0.6%), with operating income turning (q-q) to positive territory as para-xylene spreads waxed stronger in 1Q23 thanks to strong gasoline refining margins. [Base oil] OP should come in around W213.0bn (-23.8% q-q; OPM of 29.5%), with the figure losing strength q-q due to a decrease in sales volume amid off-seasonality (1Q).