As refining margins, a key revenue indicator for refiners, continue to rise day after day, Korea's four refiners (SK Innovation, GS Caltex, HD Hyundai Oilbank, S-Oil) are expected to extend strong results into the fourth quarter. Refining margin is the value obtained by subtracting production expenses such as crude oil prices from petroleum product sales prices. Recently, as crude prices have fallen while the number of refining facilities worldwide has decreased, refining margins have been rising day after day.
According to the refining industry on the 12th, the Singapore complex refining margin was around $16 per barrel in early this month, marking a record high in two years and two months. The Singapore complex refining margin refers to the average profit left after refining companies in Asia process crude oil and sell petroleum products such as gasoline, diesel, naphtha, and jet fuel.
The refining margin that typically serves as the breakeven point for refiners is known to be $4–$5 per barrel. Higher than this implies a surplus, and lower implies a deficit. However, because refiners differ in crude import sources and product portfolios, the Singapore refining margin and a given refiner's refining margin do not necessarily match.
As crude prices have recently declined, petroleum product production expenses are trending downward. Dubai crude futures moved around an average of $80 in Jan. this year but fell to about $65 this month. Benchmark contracts for Brent and West Texas Intermediate (WTI) are priced at $63 and $59, respectively.
With crude output set to increase, prices are likely to fall further going forward. OPEC+, a consultative body of major oil-producing countries, decided to raise crude production by 137,000 barrels per day next month. The International Energy Agency (IEA) also projected that supply next year could exceed demand by up to 4 million barrels per day.
As crude oversupply persisted, Saudi Aramco, the world's largest oil company, set the December official selling price (OSP) for Asia-bound crude at $1 per barrel, down $1.2 from the existing price. OSP is the premium applied when selling crude to domestic refiners. When the OSP falls, domestic refiners can also buy crude at lower prices.
In Europe, capacity has fallen by 400,000 barrels per day since March this year as Shell, BP and others shut refining facilities. In the United States, LyondellBasell, Valero and others have also been cutting refining facilities in succession since early this year. By the first quarter of next year, 547,000 barrels per day of refining capacity is slated for closure. This corresponds to 3% of total facilities in Europe and the United States, respectively. Overseas refiners are reducing refining facilities amid declining petroleum product demand due to economic downturns and a strengthening push for carbon neutrality.
As refining margins improve, there are expectations that Korea's four refiners will post strong results in the fourth quarter, following the third. According to financial data firm FnGuide, SK Innovation's estimated operating profit for the fourth quarter is 308.7 billion won, and S-Oil's is 291.5 billion won. Unlisted companies HD Hyundai Oilbank and GS Caltex have similar business structures and are expected to remain in the black.
The recent sharp rise in the won-dollar exchange rate, which has increased cost burdens, is a somewhat limiting factor for earnings improvement. However, industry officials judge that the burden is minimal because refiners are actively using hedging to reduce losses from exchange-rate fluctuations and it is relatively easy to reflect them in product prices.
Meanwhile, as refiners' fundamentals gradually improve, some are discussing vertically integrating refiners and petrochemical companies as part of petrochemical restructuring measures. This would involve a refiner acquiring and operating petrochemical facilities and using byproducts from crude refining as petrochemical feedstock.
A refining industry official said, "Building a linkage system between refining and petrochemical facilities requires massive initial expenses," adding, "Nothing specific is being discussed yet regarding petrochemical restructuring."