As military tensions between the United States and Iran rise again, international oil prices are also climbing anew. With concerns about "reverse lagging (when oil prices stabilize lower, companies that imported materials and supplies at high prices must sell products cheaply)" easing and strong refining margins continuing, there are projections that refiners will keep improving their earnings in the second half.
On the 10th (local time) at the London ICE Futures Exchange, Brent crude for November delivery rose 6.3% from the previous day to $107.63 per barrel. It gained for five straight sessions. West Texas Intermediate (WTI) futures for October delivery, traded on the New York Mercantile Exchange, also climbed 6.7% from the previous day to $102.48 per barrel.
International oil prices surged after the war between the United States and Iran broke out in February, topping $110 per barrel in May. After the two countries began cease-fire talks, prices turned weaker and fell to the $70-per-barrel range in early July.
The recent rapid rise in oil prices, which had been stable for a while, is because the United States and Iran have clashed again, worsening the Middle East situation. The Houthi rebels, a pro-Iran faction active in Yemen, struck key facilities of Aramco, Saudi Arabia's state-run oil company. There were also reports that an Iranian oil tanker near the Strait of Hormuz was hit by a U.S. missile attack.
The Islamic Revolutionary Guard Corps (IRGC) has warned of retaliation for the U.S. attack. As the two countries fail to find a diplomatic solution and continue to clash, projections are again growing that the war will drag on. Brent and WTI jumped to their highest levels since May 19.
In Korea's refining industry, there is an opinion that the renewed rise in oil prices will be a boon for refiners' earnings. This is because the likelihood of a reverse-lagging effect, which had been a concern if oil prices fell sharply in the second half, has greatly diminished.
Major refiners such as SK Innovation, GS Caltex, and S-Oil saw a marked improvement in first-half results due to factors including the "lagging effect." The lagging effect refers to selling petroleum products refined from crude oil imported cheaply in the past at higher prices as oil prices rise.
For SK Innovation, first-quarter revenue rose 15.2% year over year to 24.2121 trillion won, and operating profit swung to a surplus at 2.1622 trillion won. In the second quarter, revenue increased to 29.1572 trillion won, and operating profit reached 3.4873 trillion won.
S-Oil also returned to the black in the first half with operating profit of 2.1961 trillion won, from an operating loss of 365.5 billion won in the same period last year. The refining institutional sector posted operating profit of 1.039 trillion won in the first quarter, followed by 532.4 billion won in the second quarter, continuing the improvement in results.
A refiner official said, "At the end of the first half, when the United States and Iran were conducting end-of-war talks, there were significant concerns about reverse lagging due to falling oil prices," and added, "We had predicted that second-half results would backtrack compared with the first half." The person added, "Given that the Middle East situation is unlikely to stabilize again in just one to two months, the refining institutional sector is projected to generate stable revenue in the second half as well."
When oil prices rise, inventory valuation gains on crude oil held by refiners also increase. Although the refining industry notes that each company's stockpiles, import prices, and exchange rates vary, it estimates that when oil rises $10 per barrel, each company posts about 200 billion won in valuation gains.
Refining margins, a profitability gauge for refiners, are widely expected to keep rising through the end of the year. The refining margin is the price of petroleum products minus crude purchase expense, refinery operation expense, transportation costs, and other items. In Korea's refining industry and financial markets, the Singapore complex refining margin is commonly used as the benchmark, with the break-even point known to be around $4–$5.
According to the refining industry, the Singapore complex refining margin, which was in the $20-per-barrel range through June, surged to the high $40s in July. It turned lower in August, but is still hovering around $40 per barrel, about eight times the break-even point.
The reason refining margins have remained strong is that facilities in major countries have been damaged, disrupting petroleum product refining. Following the Russia-Ukraine war that began in 2022, this year's outbreak of war between the United States and Iran has further hindered the operation of refineries in Russia and the Middle East, which had accounted for a large share of the global market.
A refining industry official said, "In recent years, as Western countries have led a push toward eco-friendly energy transition, the expansion of new refining facilities has proceeded very slowly," and added, "Even if the war ends, it will be difficult to restore destroyed facilities in a short time, so strong refining margins are likely to continue for the time being."
The securities industry is also steadily raising its second-half operating profit estimates for refiners.
For S-Oil, the third-quarter operating profit outlook (consensus) compiled by financial data firm FnGuide was 1.0574 trillion won, a surge of about 360% from a year earlier. NH Investment & Securities said in a report on the 7th that it expects S-Oil's third-quarter operating profit to reach 1.2945 trillion won, more than 22% above the consensus.
Shinhan Investment & Securities predicted that SK Innovation will show a steady improvement trend in the second half as well, with full-year operating profit reaching 9.2187 trillion won, exceeding the consensus by 500 billion won. It projected operating profit in the refining institutional sector at 2.9 trillion won in the first half and 2 trillion won in the second half.
Lee Jin-myeong, an analyst at Shinhan Investment & Securities, said, "While there is a possibility of short-term corrections in oil prices and refining margins after geopolitical risks ease, crude procurement will recover first through rerouted shipping, whereas restoring refining facilities and rebuilding product inventories will require much more time."