Korea's four refiners that returned to the black in the second half of this year (SK Innovation, GS Caltex, HD Hyundai Oilbank, S-Oil) are expected to extend their earnings improvement into next year. International oil prices are falling day after day on concerns about oversupply, while refineries around the world are shutting down, keeping supplies of petroleum products tight. In particular, if the Russia-Ukraine war ends, increased supplies of Russian crude are likely to further drive down global oil prices.
On Dec. 5, FnGuide said SK Innovation's estimated operating profit is 332 billion won for the fourth quarter, 368.2 billion won for the first quarter next year, and 366.2 billion won for the second quarter. Over the same period, S-Oil's estimated operating profit is projected at 288.6 billion won → 278.5 billion won → 377 billion won. Unlisted peers with similar business structures, GS Caltex and HD Hyundai Oilbank, are expected to show a similar earnings trajectory.
Korean refiners posted strong results as refining margins rose even as international oil prices fell in the third quarter. The combined operating loss in the refining institutional sector of the four refiners in the first half exceeded 1.3 trillion won, but in the third quarter SK Innovation posted 304.2 billion won, GS Caltex 246.4 billion won, S-Oil 115.5 billion won, and HD Hyundai Oilbank 229.7 billion won in operating profit, with all four returning to the black.
As refining margins rose day after day, profitability in the refining industry improved. The refining margin, a key gauge of profitability, is the price of petroleum products minus production costs such as crude prices. Recently, the Singapore complex refining margin has hovered around $18 per barrel. The refining margin that typically marks the breakeven point for refiners is $4–$5 per barrel.
When oil prices fall, refiners' raw materials costs decline. West Texas Intermediate (WTI) front-month futures traded around $78 per barrel early this year but have fallen to about $59 as of today. Over the same period, Brent and Dubai crude futures also dropped from around $80 to the low $60s. The U.S. Energy Information Administration (EIA) expects WTI to average in the low $50s per barrel next year.
If the Russia-Ukraine war wraps up, international oil prices are expected to fall further. Recently, the U.S. government has met separately with the Russian and Ukrainian governments to negotiate conditions to end the war. Park Sang-hyun, an analyst at iM Securities, said, "On top of the Organization of the Petroleum Exporting Countries (OPEC) continuing its stance of expanding crude output, U.S. crude production is increasing," adding, "If the Russia-Ukraine war ends, full-scale exports of Russian crude will likely deepen the global crude market's oversupply."
If energy sanctions on Russia are eased after a cease-fire, up to 1.2 million barrels of crude could be added to supply. As part of sanctions, the United States, the European Union and others banned imports of Russian crude, cutting Russia's daily crude output from 11 million barrels before the war to 9.8 million barrels in July. In the meantime, Russia sold crude to China and India or used a "shadow fleet" that disguised ship nationality to evade sanctions.
While crude supplies are increasing, supplies of refined products are tight as refineries in the United States and Europe are shutting down. Government decarbonization policies, aging facilities, and shrinking refining margins have all played a role.
In the United States, Phillips 66 plans to close a California refinery that produced 120,000 barrels per day and convert it into a renewable fuel plant. Marathon Petroleum is also closing or considering repurposing a California facility that produced 160,000 barrels per day. Russia's major refineries have reportedly suffered reduced operating capacity after being attacked.
However, the won-dollar exchange rate is a variable. Crude payments are settled only in dollars. When crude is imported, foreign-currency liabilities arise; if the won-dollar rate rises, the size of liabilities converted into won increases, causing foreign exchange losses. The four Korean refiners import about 1 billion barrels of crude a year, but export only about half after refining. They receive payment in dollars for half and in won for the rest, limiting the extent to which foreign-currency liabilities can be offset.
In its third-quarter report, SK Innovation said a 10% rise in the exchange rate would reduce pre-tax profit by about 154.4 billion won. Still, refiners are minimizing the impact by using various hedging strategies to reduce losses from exchange rate fluctuations.
Some say it will be hard to expect better results next year even if international oil prices fall. That is because there is significant uncertainty in determining refining margins. Even if global oil prices fall, refining margins can decline if product selling prices drop due to weaker demand. There is also a one- to two-month lag from crude purchases to product sales; if oil prices plunge, the value of crude bought in advance falls, potentially causing inventory valuation losses.
A refining industry official said, "Refining margins have improved since the third quarter this year, boosting results, but it's unclear whether next year will be good. If cease-fire talks drag on, volatility in oil prices could swing results. Next year's performance will likely depend on inventory valuation gains and losses, refining margins, and utilization rates at major refineries."