Refiners' Outlook Bleak due to Saudi's Production Cut
06.14.2023 By News - NEWS

June 14, 2023 [The Korea Times]- The outlook for local refiners is dimming due to Saudi Arabia’s plan to cut oil production, in what observers say could be a trigger for sustained higher prices overshooting the threshold for maximum allowable operating loss.

A rise in global oil prices translates into a corresponding increase in product prices, almost always leading to short-term gains. But undercutting the otherwise benefit is low and stagnant refining margins, unlikely to identify momentum for a rebound any time soon. Refining margins are the difference in value between the products produced by a refinery and the value of the crude oil used.

Global oil prices are somewhat fluctuating, led by a combination of oil producer countries meeting and geopolitical developments involving the U.S. and Middle Eastern countries.

Chief among the factors is Saudi Arabia’s plan to cut oil production by 1 million barrels per day for at least a month starting next month.

Other factors are whether and by how much oil production will be cut by OPEC+, a consultative body of non-OPEC countries such as Russia.

OPEC is short for Organization of the Petroleum Exporting Countries. It is an entity enabling the cooperation of leading oil-producing countries to collectively influence the global oil market and maximize profit.

Market watchers say the price fluctuation will be limited to a range of between $70 (90,000 won) and $80 for the time being, affected only by the timeline of China’s reopening.

The price of West Texas Intermediate (WTI) futures on the New York Mercantile Exchange (NYMEX) for July closed at $71.29, June 11, down 1.71 percent from the previous session.

Refining margins hovers in the $4 range, a break-even point, a figure too low to offset the expected decrease in operating margins due to the global economic woes compounded further by the upward trajectory of U.S. interest rates.

“The industry will not be able to see meaningful growth momentum, unless countered by earlier-than-expected clearing of unfavorable factors such as tightened consumption in the second half of the year,” an industry official said.

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