As cease-fire talks between the United States and Iran enter the final stretch, expectations are growing that traffic through the Strait of Hormuz will soon resume, but forecasts say refining margins, a key gauge of refiners' profitability, will remain strong for the time being. That is because it will likely take a long time to repair refining facilities in the Middle East, and countries' stockpiling demand is rising, which could keep crude supplies tight through the end of the year.
According to the financial investment industry on the 27th, this month's Singapore complex refining margin has been in the mid-$20s per barrel, far above the breakeven level of $4–$5. That is much higher than the first-quarter average of $9 per barrel this year.
A refining margin refers to the net profit a refiner earns by refining imported crude oil into various petroleum products such as gasoline and diesel and selling them. Korean refiners use prices in the Singapore market, the logistics hub for petroleum products in the Asia-Pacific region, as the benchmark.
Refining margins rose because international oil prices surged due to the war between the United States and Iran. Although international oil prices have recently turned weaker on news that the United States and Iran are nearing a principled deal centered on reopening the Strait of Hormuz, they remain high compared with before the war.
According to the Korea National Oil Corporation's Opinet, as of the 25th, the spot price of Dubai crude was $98 per barrel. The price of Dubai crude rose to $169 on Mar. 23 and then fell below $100. However, it is still up 60% compared with $60 at the start of the year. On the day, front-month Brent settled at $96 and West Texas Intermediate (WTI) front-month settled at $90, both more than 30% higher than at the start of the year.
As refining margins strengthened, the earnings of Korean refiners also improved markedly. The combined operating profit of the four refiners—SK Innovation, GS Caltex, S-Oil, and HD Hyundai Oilbank—in the first quarter was 5.9635 trillion won. That is the second-highest on record after the combined operating profit of 7.5536 trillion won in the second quarter of 2022, when oil prices soared due to the Russia-Ukraine war.
Improved refining margins and revenue growth stemmed from inventory effects due to rising oil prices. The so-called "lagging effect," in which crude purchased earlier at lower prices is reflected in product prices with a time lag, boosting profit, was maximized.
Experts expect strong refining margins to persist at least through the end of the year even if traffic through the Strait of Hormuz resumes.
Even before the war broke out, oil corporations were shutting refining facilities worldwide to cope with deteriorating profitability. Just last year, global oil companies including Petroineos, Shell, and BP closed facilities equal to 3% of total capacity in the United States and Europe. On top of that, key oil facilities in major producing countries were also knocked offline by airstrikes due to the war between the United States and Iran.
Yun Jae-seong, an analyst at Hana Securities, said, "Second-quarter refining margins are expected to be in the $15–$20 per barrel range," and noted, "Damage to refining facilities in the Middle East and Russia is around 5% of global output, and it will likely take another year to return to normal operations."
Supply is shrinking, but countries are expected to continue moving to secure crude inventories. According to the Korea Energy Economics Institute (KEEI), global oil inventories have been steadily declining since March, when the Strait of Hormuz was blocked. As of the end of April, global oil inventories had plunged to 7.9 billion barrels. The inventory declines in March and April were 129 million barrels and 117 million barrels, respectively.
However, some in the refining industry are voicing concerns about a "reverse lagging effect." If crude supply increases and international oil prices continue to weaken, the value of crude now being secured at high prices could fall, leading to inventory losses.
The issue of compensating losses from the government's "oil price cap," which has been in place for more than two months, is also ongoing. The gap between the government and the refining industry over the standards for compensation is wide, suggesting it will take considerable time for actual payment. This could add to the industry's liquidity burden when a period of falling oil prices arrives.
A refining industry official said, "As discussions on reopening the Strait of Hormuz take shape, supply-demand anxiety has somewhat eased," and added, "We are closely monitoring volatility in international oil prices and the trend in refining margins."