A steady rise in refining margins, a key indicator of oil refiners’ profitability, is raising expectations for an earnings improvement of domestic oil refiners in the second half of this year.
The benchmark Singapore complex gross refining margin (GRM) stood at US$10.1 per barrel in the third week of September. The figure rose for four consecutive weeks since hitting the bottom at US$4.1 a barrel in the third week of August.
In particular, the gasoline margin stayed strong against the diesel margin, surpassing US$17/bbl, the highest point since 2016. Unexpectedly, the bunker C (intermediate oil) margin also rose ahead of the enforcement of the 2020 International Maritime Organization (IMO)’s sulfur oxide (SOx) regulations.
The rise in refining margins is attributed to a hurricane in the United States, a drone attack against Saudi Arabian oil company Aramco, and a tight supply.
A refining margin is the final petroleum product price minus raw material costs including crude oil and directly affects refiners’ profitability. In the third week of September, Dubai oil recorded US$64.4 per barrel, Brent oil US$65.2 and Western Texas Intermediate (WTI) US$59.3.
As oil refineries in eastern Texas including ExxonMobil stopped operations due to a hurricane, U.S. oil refineries’ utilization rate fell to 91 percent, reducing gasoline supply. In addition, Russian refiners are scheduled to go through regular repair and maintenance work by November.
Industry analysts expect refining margins to remain solid due to strong oil prices and increasing demand for low-sulfur fuel oil ahead of the implementation of the IMO 2020.
Accordingly, securities industry analysts forecast that SK Innovation's operating profit consensus will rise from 402 billion won in the third quarter to 512 billion won in the fourth quarter and that of S-Oil from 203 billion won in the third quarter to 323 billion won in the fourth quarter.