Refiners are mired in concern as their first-quarter results, to be announced in late April to early May, are expected to improve. The first-quarter results of Korea's four refiners are projected to see operating profit rise as inventory valuation gains increase on the back of higher international oil prices due to the Middle East crisis.
Refiners worry that inventory valuation gains are merely paper profits and could turn into losses if oil prices fall later, and that, if refiners appear to have improved results while the Middle East crisis has heightened energy supply strains, policies targeting refiners, such as a windfall tax, could emerge.
On the 2nd, multiple refinery industry officials said, "When international oil prices rise, refiners' inventory valuation gains increase, leading to improved results," and added, "We are concerned that additional policies like a windfall tax could come out while the price-cap regime and other measures have already narrowed refiners' room to maneuver."
Refiners' inventory valuation gains increase when international oil prices rise. That is because the value of crude purchased earlier climbs in tandem. It takes more than a month for a refiner to import crude from the Middle East and elsewhere and bring it into the country. There is usually a lag of a month or two between a refiner's crude intake and its refining and sales.
When inventory valuation gains increase, operating profit rises. Since international oil prices have exceeded $100 per barrel after the Middle East crisis, inventory valuation gains, which are book profits, are bound to increase.
As of the 1st, Dubai crude traded at $108.9 per Barrel, Brent at $101.16, and WTI at $100.12. As of Feb. 27, just before the war, Dubai crude was $71.24 per Barrel, Brent $72.48, and WTI $67.02.
It is widely known that for every $1 increase per Barrel in oil prices, domestic refiners' inventory valuation gains rise by tens of billions of won.
According to FnGuide, S-Oil's estimated first-quarter operating profit is 561.9 billion won, and SK Innovation's is 449.1 billion won. Compared with the fourth quarter of last year, S-Oil's operating profit is projected to increase by 190 billion won and SK Innovation's by 213 billion won. Unlisted GS Caltex and HD Hyundai Oilbank are also expected to show a similar trend.
A refinery industry official said, "The outlook expected by the securities market likely has not yet fully reflected the post–Middle East crisis situation," adding, "First-quarter operating profit could be higher than the current estimates."
Another factor improving refiners' first-quarter results was strong refining margins before the war broke out. The refining margin, a key indicator of a refiner's profitability, is the price of petroleum products such as gasoline and diesel minus production costs including crude prices and shipping.
According to NH Investment & Securities, the refining margin in January–February of this year, before the Strait of Hormuz was blockaded, was $9.1 per Barrel, exceeding the 2010–2025 average of $5.8, excluding 2022 when refining margins soared due to the Russia-Ukraine war. The refining margin considered the breakeven point for refiners is $4–$5 per Barrel.
A refinery industry official said, "In March, after the Middle East crisis, higher freight costs likely reduced refining margins compared with January–February, but overall first-quarter refining margins are decent," adding, "It's a situation where refiners' first-quarter results should be good."
Refiners are instead worried that first-quarter results could come out quite strong. That is because adding the improvement in refining margins to the increase in inventory valuation gains could produce results better than current securities market expectations.
A refinery industry official said, "If high oil prices persist, demand for petroleum products will eventually fall, which is negative for operating profit, and since high oil prices will not last, first-quarter gains will eventually be offset later by inventory valuation losses," adding, "When refiners post operating losses, they get little attention, but when operating profit is strong, a windfall tax is brought up, which is concerning."
A windfall tax is a system that imposes additional tax when a specific company earns profits far exceeding expectations. When international oil prices rise and refiners' operating profit increases, public opinion that "the public's burden is growing while refiners make money" tends to form, and the policy regularly appears in political circles.
Jang Cheol-min, a lawmaker with the Democratic Party of Korea, on the 11th of last month introduced a partial amendment to the Corporate Tax Act to impose an additional 20% corporate tax on excess profits, targeting refiners and others. The bill stipulates that if the annual operating profit of a listed petroleum refiner or a liquefied petroleum gas (LPG) district supplier exceeds the previous three-year average by more than 500 million won, an additional 20% corporate tax will be levied on the excess income.