Oil Prices Jumped 10%, but How Will the Four Refiners Perform? Refining Margins and Lubricants Are Key Variables

[Financial News] International oil prices have risen nearly 10% in a week, but analysts say the second-half performance of Korea’s refiners cannot be judged solely by the size of the increase. Refining margins remain high amid a shortage of petroleum products, while the official selling price (OSP) of Saudi Arabian crude remains low.
According to Petronet, operated by the Korea National Oil Corporation (KNOC), and the refining industry on the 9th, Dubai crude was priced at $101.91 per barrel on the 4th. That represented a 9.3% increase over the previous week. West Texas Intermediate (WTI) crude oil also rose 9.7% during the same period to $91.48 per barrel.
However, a rise in international oil prices does not immediately translate into improved profitability for refiners. The indicator that has a more direct impact on their performance is the refining margin. This is the price difference left after refiners purchase crude, process it into petroleum products such as gasoline and diesel, and sell those products.
The average complex refining margin in Asia has recently remained relatively high at $33.6 per barrel, while the diesel margin stood at $58.7. Analysts attribute this to tight supplies of middle distillates such as diesel, as Middle Eastern and Russian supply disruptions coincided with U.S. refinery utilization rising to 98%.
The high refining margins were also reflected in the first-half results of the four refiners. GS Caltex’s refining business posted an operating profit of 3.7278 trillion won, while the refining divisions of HD Hyundai Oilbank and S-Oil posted 2.1918 trillion won and 1.5714 trillion won, respectively. SK Innovation’s first-half refining operating profit is estimated at approximately 2.938 trillion won, based on securities analysts’ estimates.
In the second half of this year, crude procurement costs are expected to be a key factor differentiating the companies’ performance. Saudi Aramco set the OSP for Arab Light crude exported to Asia in October at $2 per barrel below the average of Oman and Dubai crude prices. For example, if the benchmark price is $100 per barrel, this means Aramco would sell Arab Light crude to Asian refiners for about $98. The level is unchanged from September, marking a negative OSP for the third consecutive month. Analysts say this could partially reduce the purchasing-cost burden for refiners with a high proportion of Saudi crude.
In addition, S-Oil has a long-term crude purchase agreement with its largest shareholder, Saudi Aramco. An S-Oil official said, "We replaced most of the volumes that had been passing through the Strait of Hormuz by using Saudi Arabia’s east-west pipeline to route them to Yanbu Port on the Red Sea," adding, "As we continue to bring in Saudi crude, the OSP cut is positive in terms of crude purchasing costs." The official explained, however, that "the effect of the OSP cut could be partially offset depending on total freight costs and other factors."
Other refiners are increasing their efforts to secure non-Middle Eastern crude. HD Hyundai Oilbank is expanding its crude procurement sources to countries such as the United States and Mexico. GS Caltex is also diversifying its supply sources, including U.S. crude, while considering economic efficiency and supply stability.
Lubricants and lubricant base oil are also considered businesses supporting the four refiners’ performance. In the first half, GS Caltex’s lubricants business posted an operating profit of 430.9 billion won, while HD Hyundai Oilbank’s lubricants division and S-Oil’s lubricants division posted 203.4 billion won and 644 billion won, respectively. SK Innovation’s first-half operating profit from lubricants is estimated at approximately 880.4 billion won.
A refining industry official said, "At present, what matters is not the oil-price level itself but whether refining margins can be maintained amid the shortage of petroleum products." The official added, "Differences in second-half performance may emerge depending on each company’s crude supply sources and freight costs, OSP, and lubricant base oil market conditions."
[email protected] Mi-hee Kim Reporter