IBK Securities said on the 9th that, while rate hikes are typically seen as a headwind for oil refiners, it is worth noting that a high-rate environment raises discount rates for new facilities and confers scarcity value on existing facilities. It kept S-Oil(010950) as its top pick in the refining sector.
Rate hikes are generally perceived to negatively affect refinery stocks, as they are thought to slow the economy and dampen demand for petroleum products.
Researcher Lee Dong-uk at IBK Securities said, "In the refining industry lately, we need to look at the supply-side impact of rate hikes as much as the demand side."
A high-rate environment raises the hurdle for new capacity additions and increases the pressure to retire old, high-cost facilities. If demand does not fall sharply, utilization of existing refining facilities and their relative asset values could instead rise.
Lee said, "In particular, S-Oil(010950)'s refining facilities, which have already seen large-scale investment, are more likely to be evaluated as hard-to-replace assets as the economics of new facilities worsen."
He added that a more direct path linking interest rates and refining margins is inventories. Because crude oil and petroleum products require substantial working capital as inventories, when rates rise, not only refiners but also traders and distributors face higher inventory financing costs, increasing the incentive across the supply chain to lower appropriate inventory levels.
Thus, while rates do not directly lift refining margins, they reinforce an environment where it is hard to hold ample inventories, increasing the likelihood that small supply-demand shocks translate into larger margin swings.
Lee said, "For this reason, in the refining sector lately, the duration of elevated refining margins should be seen as more important than the peak level," adding, "In the past, margin upswings started with economic recovery and rising demand for petroleum products, but now what matters is how long low inventories and limited supply capacity can sustain high utilization."
Lee also said that in the stock market, high rates are a variable that changes how the relative value of refinery stocks is viewed. As rates rise, the present value of growth stocks—whose value leans heavily on far-future profits—gets discounted more, whereas the refining sector generates current cash flow from already-built facilities.
Lee said, "Rather than a simple rotation from growth to value in times of rising rates, we can view the flow of funds as moving from assets that will require massive capital outlays going forward to cash-generating assets that have already seen significant investment," adding, "The higher the investment hurdle for new refining facilities, the greater the relative value of the cash flows produced by existing competitive facilities."