Saturday, June 6, 2020
Oil Refiners Expected to Face Rough Roads Ahead
Recovery Hard to Expect in 2nd Quarter
Oil Refiners Expected to Face Rough Roads Ahead
  • By Jung Suk-yee
  • April 6, 2020, 13:55
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As oil refiners have been pushed to the edge of a cliff with negative refining margins, a conflict between Saudi Arabia and Russia is getting worse, amplifying a sense of crisis among oil refiners. The possibility of the two countries agreeing to cut production cannot be ruled out, but in this case, cost burden may increase in the short term, dimming the prospect of a recovery in the second quarter.

Dubai Crude traded at US$24.51 per barrel on March 3 while Western Texas Intermediate (WTI) traded at US$28.34. On this day, international oil prices surged more than 10 percent from the previous day on expectations for cuts ahead of an emergency meeting between the Organization of Petroleum Exporting Countries (OPEC) and non-member countries, which was originally scheduled for April 6 (local time).

However, despite the intervention of U.S. President Donald Trump, the conflict between Saudi Arabia and Russia caused the meeting of the OPEC+ (Coalition of the OPEC and 10 major oil producing countries) to be delayed to April 9, expanding anxiety. Early April, Dubai Crude recorded US$21.23 and WTI US$20.31, respectively, but they may drop below the US$20 mark.

Saudi Arabia and Russia failed to hammer out an agreement at a meeting in March, causing the international oil prices to plunge to one third the US$60 level recorded earlier this year. In February, the COVID-19 outbreak was limited to some regions such as China, but now it spread all over the world including the United States, Europe and India, further weakening the expectations for a demand recovery. In April, Saudi Arabia is expected to increase production, intensifying the imbalance in supply and demand.

Refiners are expected to run on rough roads in the second quarter, too. Securities firms estimate the four major Korean oil refining companies' operating losses in the first quarter at one trillion won as inventory valuation losses due to plunging oil prices will combine with worsening margins. In the fourth week of March, Singapore's combined refining margin entered an unprecedented new territory, continuing a negative for two weeks in a row at US$-1.1 per barrel. The oil refining industry regards US$4 as a break-even point of refining margins.

Even if a dramatic agreement is made between Saudi Arabia and Russia, recovery in the second quarter is unlikely to take place. If the OPEC+ group agrees to cut production in the April 9 meeting, supply burden may be partially eased, but in this case, rising oil prices will definitely increase cost burden.

Rebounding oil prices may generate negative effects in the current situation where demand will hardly recover with the spread of the novel coronavirus and the refining margin is negative. In reality, representative demand industries such as automobiles, aviation, shipbuilding, and shipping have virtually stopped, so oil refiners do not have buyers to sell products to.