Absence of Effective Counterplan
As U.S. investment banking giant Goldman Sachs release a report that recommends investors sell the stocks of Korean oil refining companies, Korean oil companies are hard put. This is because they cannot come up with an effective counterplan, though the report published by the global investment institution will have a huge impact on the market.
According to industry sources on August 10, Goldman Sachs adjusted the stock recommendation rating of domestic oil refineries such as SK Innovation and S-Oil to “Sell,” saying the profitability of the oil refining sector can be worsened due to the recent increase of supply in Asia.
Goldman Sachs said an increasing number of oil refining facilities will be established in the Asian region in the second half of this year, which will boost supply and lower refining profits, and South Korean oil suppliers, which are highly dependent on exports, will be hit the hardest.
In this regard, domestic oil refineries said this was not true. An official from the industry said, “Other securities firms and investment banks at home and abroad don’t have a negative outlook on the domestic oil refining industry but only Goldman Sachs holds a different views. We are very concerned because a good number of institutional investors give a lot of weight to Goldman Sachs’ opinions.”
Domestic oil refining firms say the expansion of oil refining facilities in Asia, which is a big factor of lower profitability according to Goldman Sachs, will not work out as planned. According to London-based consultant Energy Aspects, new facilities with a total capacity of 4.7 million barrels are set to be established in China, India and Vietnam by the end of next year but most of them have been delayed. About 3 million barrels of facilities can start operation on time. Since the expansion will not be completed at once, the supply will not increase rapidly and the aftereffects wouldn’t be that serious.
Korean oil refineries also disagreed with the possibility of lower oil refining margins. It’s natural that the expansion will affect oil refining margins but it should not be only considered in the view of supply. As China has been recently raising the economic growth rate and other regions including India are also expanding investment in infrastructure, demand can grow further. In fact, Argus Media, a leading provider of business intelligence and market data for the global energy market, predicted that the oil refining margin in Asia will stand at US$7.80 to 9.10 (8,908 won to 10,392 won) per barrel later this year.
An official from an oil company said, “Starting from last year, Goldman Sachs has continuously recommended investors should purchase the stocks of Indian oil refineries and sell Korean oil refining companies. There is no way for domestic oil firms to clarify their positions so it just weighs down heavily on them.”