Barely Breaking Even
Korean oil refiners’ refining margins averaged US$4 per barrel in the second quarter of this year. That represented a drop of more than half from the previous quarter and a drop of more than 80 percent from the same period last year. Their second-quarter operating profits are also expected to shrink by more than 96 percent year over year.
The average Singapore composite refining margin from April to June this year was US$4 per barrel, according to sources in the Korean refining industry on July 16. Given that oil refiners typically break even at US$4, this means they made nearly no profit. Compared to the same period of 2022, it was a decrease of 81.4 percent. At that time, refining margins were US$21.51 per barrel.
Last year’s high refining margins were due to a combination of an increased desire to travel with the end of the COVID-19 pandemic and a ban on Russian crude imports due to the war in Ukraine. In short, the supply of petroleum products decreased and demand increased, resulting in a sharp increase in refining margins.
As a result, operating profits of Korea’s four major refiners (SK Energy, GS Caltex, S-OIL, and HD Hyundai Oilbank) are expected to plummet in the second quarter. Financial information firm FnGuide and securities firms forecast that SK energy will post an operating loss of 305.8 billion won (US$241.7 million) in the second quarter of this year, GS Caltex 80 billion won, S-OIL 25.67 billion won, and HD Hyundai Oilbank 244.9 billion won. The four’s total will reach 275.8 billion won, down by 96.3 percent from the same period of 2022 and down by 78.6 percent from the previous quarter.
However, the Korean refining industry is expected to improve in the second half of this year. In fact, oil refineries’ refining margins are expected to steadily increase in the second half of this year. After averaging US$3.50 per barrel in April, refining margins rose to US$3.90 in May and US$4.60 in June. In the first week of July, refining margins were US$4.40 per barrel.
More good news is that international oil prices and product spreads (margins) are recovering. Typically, refining margins rise with oil price hikes except when crude oil prices outweigh oil product prices. The price of Dubai crude oil at the close of trading on July 13 was US$81.90 per barrel. This marked the first time since April 26 that the closing price of Dubai crude oil has been above US$80 per barrel.
Product spreads are also rising slightly. Excluding refining margins for gasoline, July refining margins for kerosene, diesel (0.001 percent), and diesel (0.05 percent) were US$16.10, US$18.70, and US$18 per barrel, respectively, as of July 13, according to the Korea National Oil Corp.’s Opinet. All of them inched up from the Q2-Q4 averages of US$14, US$15.60, and US$14.60.