U.S.-China Trade Disputes Significantly Affecting Oil Refining Companies

Oil refining and chemical companies are being seriously affected by the ongoing trade disputes between the United States and China. Oil refining companies’ Singapore refining margin on a weekly basis, which is a key index of their profits, dipped below zero for the first time in 18 years and the ethylene-naphtha price gap per ton fell to the BEP level.

The decline in refining margin is because of a sluggish demand attributable to the trade disputes and increases in capacity utilization in the United States and China. At present, Chinese oil refineries’ capacity utilization is close to this year’s high and they are creating profits by importing cheap crude oil from Iran despite U.S. restrictions. In addition, U.S. oil refineries are churning out products at a capacity utilization of about 90 percent. The United States is higher in cost competitiveness than countries dependent on Middle Eastern crude oil, such as South Korea, thanks to shale oil.
 

IMO 2020 for a decrease in ship fuel sulfur content from 3.5 percent to 0.5 percent, which is scheduled to become effective at the beginning of next year, is another hurdle. The high-sulfur bunker oil price is around US$37.9 per barrel this month, down almost 50 percent in two months, whereas the price of light oil is US$75.7, close to that of two months ago. This is because oil refining companies increased their light oil production in preparation for IMO 2020 to cause a supply glut while the bunker oil demand dropped.

The decrease in refining margin is predicted to lead to large Q4 operating losses of SK Innovation, GS Caltex, Hyundai Oilbank and S-Oil. When it comes to S-Oil, the Q2 operating loss amounted to 90.5 billion won and the Q3 operating profit stood at 230.7 billion won whereas the profit reached 315.7 billion won in Q3, 2018. The others are facing similar conditions, too.

Those companies are planning to offset the losses by investing more in the chemical sector, but the sector is not that rosy, either. As mentioned above, the gap between the prices of the raw material and the intermediate product fell to US$212 per ton last month and losses are looming large. According to experts, profits are possible when the spread is at least US$250 to US$300.
 

Still, it is also said that the dropped bunker oil price will offset the decline in profit at least to some extent. The companies have invested trillions of won for years in facilities for producing high value-added products from residues such as bunker oil. As of the beginning of this year, such facilities accounted for 40.6 percent of Hyundai Oilbank’s facilities, 34.3 percent of GS Caltex’s, 33.8 percent of S-Oil’s and 29 percent of SK Innovation’s. For reference, the ratio is about 20 percent in the case of Japanese and Chinese oil refineries.