Facing Headwinds
Domestic refiners and petrochemical industries have been made tense by international oil prices’ continuing decline such as a seven month low.
West Texas crude oil (WTI) and Brent crude oil hit US$44.20 and US$46.91 a barrel, respectively, on June 19 (local time), the lowest since November of last year. Dubai crude oil, which influences domestic oil prices in Korea, also fell by US$0.20 to US$45.68 a barrel.
Oil prices have sunken more than 15% since OPEC members and non-OPEC members extended a production reduction deadline by nine months at the end of May. Analysis says that this is because concerns about a glut expanded as Libya and Nigeria, which did not sign the OPEC’s production reduction agreement, recovered their production volume and the US scaled up its own production.
The Korean oil refining industry is expected to be directly hit by losses in inventory evaluations. It takes about 30 to 45 days for oil refiners to import crude oil into Korea, produce petroleum products and sell them. If oil prices fall during the period, the value of crude oil inventories will decrease and related valuation losses will be incurred.
As crude oil prices continue to weaken, refineries are responding to the crisis by expanding their non-oil refining business. However, their refining sector accounts for 50% of their total sales, which makes it inevitable for refiners to face headwinds from a drop in crude oil prices. In particular, as the oil refining industry has been expecting an earnings improvement thanks to an increase in demand for oil in the driving season of the second quarter, an embarrassment is being felt by those in the oil refining industry.
The petrochemical industry is also busy calculating profits. When oil prices fall, ordinary chemical companies suffer inventory valuation losses due to a fall in naphtha prices (raw petrochemical materials produced when refining crude oil), which is used as a basic material for making chemical products.