Record-high Profits Amid Uncertain Variables
The major four South Korean oil refiners are expected to post more than 8 trillion won (US$7.53 billion) in surplus last year for the first time in history thanks to stable oil prices and a boom in non-oil refining business, including petrochemical.
According to oil refining industry sources on January 14, SK innovation Co., GS Caltex Corp., S-Oil Corp. and Hyundai Oilbank Co. are now summing up their sales performance in the fourth quarter last year and the combined operating profit of the four companies are expected to reach 2.1 trillion to 2.3 trillion won (US$1.98 billion to 2.17 billion).
The oil refiners saw their profitability improve in the fourth quarter because the global economic recovery boosted the refining margin of oil products, which is a profit subtracting the costs of crude oil and distribution from the market value of oil products, and heating demands in the winter were higher than expected. In the fourth quarter, the refining margin remained at the US$6 to 8 (6,372 to 8,496 won) level due to stable international oil prices, showing a stable profitability. Moreover, oil refining firms had a high naphtha spread, which is a profit subtracting the cost of crude oil from the value of naphtha, in the petrochemical sector, which has been focused by oil refiners as their oil refining phase-out strategy, owing to the rise in global demands.
Accordingly, the four oil refiners had an estimated surplus of 7.7 trillion to 7.9 trillion won (US$7.25 billion to 7.44 billion) in total last year. By company, SK Innovation is forecast to post 3.29 trillion to 3.34 trillion won (US$3.1 billion to 3.14 billion), GS Caltex 1.84 trillion to 1.9 trillion won (US$1.73 billion to 1.79 billion), S-Oil with 1.46 trillion to 1.5 trillion won (US$1.37 billion to 1.41 billion) and Hyundai Oilbank 1.14 trillion to 1.18 trillion won (US$1.07 billion to 1.11 billion).
With the current estimates, SK Innovation and Hyundai Oilbank hit a new record high for the year after posting 3.23 trillion won (US$3.04 billion) and 970 billion won (US$913.29 million), respectively, at the previous year.
Depending on the situation, the four oil refiners are likely to surpass an annual surplus of over 8 trillion won (US$7.53 billion) for the first time in the domestic industry. Their combined surplus in 2016 when it reached a record high stood at 7.95 trillion won (US$7.49 billion).
An official from the industry said, “The fact that the price of oil showed a stable increase at the US$50 to 60 (53,090 to 63,708 won) level per barrel is a decisive factor for oil refiners achieving the highest gains last year for two years in a row. For oil refining companies, the demand-leading market structure that the price of oil products increases with a stable trend, rather than volatility in oil prices, is the most appropriate for profitability.”
However, oil refiners are worried about oil prices that have been skyrocketing from the end of December last year. As the price of Brent crude oil climbed to the US$70 (74,326 won) mark a barrel because of numerous variables, such as the fall in the U.S. oil reserves and the extensive delay of sanctions against Iran as well as the OPEC’s extension of cutting oil production, the refining margin dropped to the US$6 (6,396 won) level a barrel, which is slightly over the break-even point.