Exports of Oil Products Expected to Fall
The Korean oil refining industry will be inevitably hit by the Wuhan coronavirus outbreak. Last year, it suffered an earnings shock due to an oversupply from China. In 2020, Korean refiners have a tough road ahead due to the spread of the Wuhan coronavirus.
SK Innovation's annual operating profit stood at 1.13 trillion won last year, down 39.6 percent from the previous year. S-Oil’s operating profit of 639.5 billion won was a 29.8 percent drop. GS Caltex and Hyundai Oilbank are slated to announce their earnings this week, but expectations are not high.
Korean oil refiners’ sluggish earnings are attributable to a sharp increase in supply as China's new oil refining facilities began their commercial operations. Demand also shrank due to the U.S.-China trade dispute. The monthly refining margin, which recorded US$7.7 per barrel in September 2019, continued to fall to -US$0.1 in December from 4.1 in October and US$0.7 in November in 2019. A negative refining margin means that more oil they sell, the more loss they suffer. Earlier this year, the price shifted positively to US$0.3 per barrel (the third week of January), but is still below US$1.
The problem is that although there is a lull in the confrontation between the United States and Iran, which occurred earlier this year, the recent outbreak of the Wuhan coronavirus shows no signs of coming to an end soon.
Korean oil refiners usually rely on exports for half of their sales, with China accounting for around 20 percent of their exports. The coronavirus outbreak will have a direct negative impact on their exports and indirectly affect oil refiners by shrinking the global economy.
International oil prices are also on the decline in the aftermaths of the spread of the new coronavirus. Dubai oil traded at US$58.45 on Jan. 31 and Western Texas Intermediate (WTI) at US$51.56, down 10.2 percent and 11.9 percent, respectively, from Jan. 17.
If international oil prices fall, the value of crude oil inventories will fall. International oil prices have risen steadily from the fourth quarter of 2019 to early this year. Given that it takes a month or so for Dubai oil to arrive in Korea, a valuation loss is highly likely to take place in the first quarter.