As SK Innovation released a surprise second-quarter result, forecasts are emerging that refiners' earnings improvement will continue in the second half. Although the recent easing of the war between the United States and Iran has driven down oil prices, raising concerns about "reverse lagging (when oil prices fall and stabilize, companies that previously brought in materials and supplies at high prices must sell products cheaply)," many say strong refining margins are likely to persist due to capacity shortages caused by the war.
According to the refining industry on the 30th, on the 28th (local time) at the London ICE Futures Exchange, September Brent crude settled at $84.09 a barrel, down 4.8% from the previous day. September West Texas Intermediate (WTI) futures traded on the New York Mercantile Exchange (NYMEX) also fell 4.1% from the previous day to $79.26 a barrel.
International oil prices surged after the war between the United States and Iran began in February. Brent crude, which had transacted at $60 a barrel in February, climbed above $110 a barrel in March. As peace talks between the United States and Iran gained momentum in mid-May, oil prices fell to the $70-a-barrel level early this month, but later broke back above $100 a barrel as military tensions between the two sides rose again.
Over the weekend, the United States decided to temporarily suspend its two-week-long airstrikes against Iran. Iran also did not launch retaliatory attacks against the United States, leaving the armed confrontation between the two sides in a lull for now. However, many expect oil price volatility to remain high in the second half because the U.S.-Iran confrontation could resume at any time.
Still, the financial investment industry expects refiners' earnings to be solid in the second half despite swings in international oil prices. That is because the rise in refining margins, a profit indicator for refiners, is expected to continue.
Refiners import crude oil, refine it, and sell various petroleum products such as gasoline, diesel, and jet fuel. The refining margin is the value obtained by subtracting crude purchase costs, refinery operating expenses, and transportation costs from petroleum product sales prices. In Korea's refining industry and financial market, the Singapore complex refining margin is generally used as the benchmark, and the break-even point is known to be in the $4–$5 range.
According to Yuanta Securities Korea, this month the complex refining margin based on the Singapore standard refinery configuration is running at $22.9 a barrel. That far exceeds the break-even point as well as last month's refining margin of $16.41 a barrel.
The Singapore complex refining margin, which hovered around $10 a barrel in the fourth quarter last year, spiked after the U.S.-Iran war broke out. In April, it even rose above $36 a barrel. Although oil prices turned weaker as the mood for a truce ripened, refining margins remain strong at roughly double the fourth quarter last year, before the war.
The outlook that strong refining margins will likely continue in the second half is based on a shortage of refining capacity. In recent years, as the global shift to eco-friendly energy has continued, refinery capacity additions have progressed slowly. On top of that, Russia's and the Middle East's refining facilities have not been fully operational due to the Russia-Ukraine war in 2022 and this year's U.S.-Iran war.
Shinhan Investment & Securities, in its second-half refining and chemicals outlook report, forecast that the second-half complex refining margin will come in around $26 a barrel. It said that even if the surge in oil prices subsides, low inventories at refiners and capacity shortages will keep refining margins on the rise.
Lee Jin-ho, an analyst at Mirae Asset Securities, also said, "Due to the impact of successive wars, delays in refinery operations continue, so there is a high possibility that refining margins will remain elevated at least until the end of this year."
In contrast to the financial market, the refining industry remains cautious about whether earnings will improve in the second half. Compared with the first half, when the U.S.-Iran war was in full swing, oil prices are more likely to stay lower, increasing the burden of reverse lagging, and inventory valuation losses are inevitably reflected.
In the first half, refiners saw a noticeable improvement in results thanks to the "lagging effect," refining crude oil they had imported and stockpiled cheaply before the war and selling it at high prices.
SK Innovation's first-quarter revenue was 24.2121 trillion won, up 15.2% from a year earlier, and operating profit swung to a profit at 2.1622 trillion won. GS Caltex also posted revenue of 13.0347 trillion won and operating profit of 1.6367 trillion won over the same period. Compared with the same period last year, revenue rose 17% and operating profit jumped 1,310%.
The improvement continued in the second quarter. SK Innovation, which released its results that day, said second-quarter revenue and operating profit came in at 29.1572 trillion won and 3.4873 trillion won, respectively. Revenue surged 49.9% from a year earlier, and operating profit swung to a profit. SK Energy, the refining subsidiary, posted an operating loss of 465.6 billion won in the second quarter last year but recorded an operating profit of 651.2 billion won in the second quarter.
Other refiners that have not yet released results are also widely expected to show improved second-quarter earnings. According to the consensus of securities firms compiled by financial information provider FnGuide, S-Oil, which posted a 344 billion won loss in the second quarter last year, is estimated to post operating profit in the 900 billion won range in the second quarter this year. Shinhan Investment & Securities recently projected S-Oil's second-quarter operating profit at 947.7 billion won in a report.
An official at a refiner said, "Reverse lagging and inventory valuation losses due to falling oil prices will be reflected fully in third-quarter results," adding, "In the industry, there is even talk that some refiners' refining business turned to a monthly loss last month." Another refining industry official also predicted, "If oil prices fall much further from here, the gap with first-half figures will widen, and the benefit from strong refining margins could be halved."
Some, however, interpret the refining industry's "caution" as intentional remarks aimed at easing government regulation. As the government recently implemented a price cap on petroleum products and moved to punish alleged collusion, refiners are emphasizing that conditions will worsen in the second half to escape regulatory pressure.
After oil product prices sold at domestic gas stations surged following the U.S.-Iran war, the government began enforcing a "maximum petroleum price system" on Mar. 13, setting a ceiling on the wholesale prices refiners charge gas stations. On the 6th, prosecutors indicted the four refiners—SK Energy, GS Caltex, HD Hyundai Oilbank, and S-Oil—on collusion charges.
A financial market official who requested anonymity said, "Unlike the highly volatile oil price, strong refining margins are a structural issue stemming from capacity shortages, so the weight of opinion is that refiners' results will improve in the second half." The official added, "However, due to the maximum petroleum price system, high refining margins are unlikely to be reflected fully in retail prices," noting, "With inventory valuation losses added by falling oil prices, the increase in operating profit may narrow somewhat compared with the first half."