August 31, 2020 [Korean Investors] – While Asia’s benchmark refining margin has risen to its highest level in five months, South Korea’s major oil refiners are still concerned about their business outlook, citing subdued demand for their key products — diesel and kerosene.

South Korea’s largest oil refiner SK Innovation Co. and other local players fear their profitability could worsen this year, weighed by an economic slowdown in emerging markets amid the resurgence of the COVID-19 pandemic.

According to the oil industry, the benchmark Singapore complex gross refining margin stood at $0.6 per barrel in the third week of August, marking the highest margin since the second week of March, when the coronavirus began its rapid spread.

Industry officials largely attributed the gains to higher demand from some countries for gasoline.

According to Korea National Oil Corp, its gasoline refining margin more than doubled to $4.9 per barrel in the third week of August, from $2.1 at the end of July.

Global crude oil prices, which move in sync with refining margins, have also returned to levels seen before the coronavirus outbreak in March. In the aftermath of the hurricane that hit the Gulf of Mexico, the West Texas Intermediate (WTI) for October delivery settled at $43.39 a barrel on the New York Mercantile Exchange on August 27, its highest level since March 3.

STATISTICAL ILLUSION

Korean oil refiners, however, said the gains are temporary and mostly a statistical illusion.

Despite the rise in gasoline refining margins in recent weeks, demand for diesel and kerosene, which make up the largest chunk of the Korean refiners’ sales, is steadily declining due to slowing economic activity in emerging countries.

The refining margin for diesel, the most common oil for industrial use, shrunk to $3.9 a barrel as of the third week of August from $6.5 a month previous. Meanwhile the kerosene refining margin remains in negative territory this month, hit by declining demand for jet fuel.

The refining margin is the difference between the total value of petroleum products and the cost of crude and related services and is considered a key indicator of refiners’ profitability. Korean refiners see $4 to $5 per barrel at the breakeven point.

H2 OUTLOOK DISMAL

Worsening refining margins, combined with tumbling oil demand due to the coronavirus pandemic, hit refiners’ bottom lines hard this year.

SK Innovation and its three local rivals – Hyundai Oilbank Co., S-Oil Corp. and GS Caltex Corp. – together posted a record operating loss of 4.38 trillion won in the first quarter. Second-quarter losses narrowed to a combined 700 billion won.

“With the resurgence of the coronavirus, industrial activity remains weak in the current quarter. We don’t expect to return to black in the second half of this year,” said an official at a local refining company.

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