Oil Refining Stocks Declining Since Early Year

SK Innovation Stock Down 11% This Year
S-Oil Also Sees Double-Digit Decline

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Eunmo Koo] Refining stocks, which had been spotlighted as beneficiaries of the International Maritime Organization (IMO)'s regulation banning the use of high-sulfur fuel oil, have seen their stock prices plunge sharply since the beginning of the year as the demand expansion for low-sulfur fuel oil has been slower than expected.

According to the Korea Exchange on the 20th, SK Innovation's stock price fell 11.0% from the beginning of this year through the 17th (closing price basis). During the same period, S-Oil also dropped 11.8%, showing a double-digit decline. In particular, SK Innovation's stock price has fallen 33.1% compared to last year's peak, and on the 16th, it dropped to 133,000 KRW, the lowest level since February 15, 2016 (130,000 KRW).

Although the IMO regulation, which was considered a factor for stock price increases this year, started this month, the improvement effect on refining margins has not met expectations, and the resulting disappointment is being reflected in the stock prices. The IMO has implemented regulations on the sulfur content of marine fuel oil starting this year. High-sulfur fuel oil, which practically accounts for 80% of the existing marine fuel oil market, is banned under this regulation. Accordingly, the existing demand for high-sulfur fuel oil is expected to shift to low-sulfur fuel oil and marine diesel oil (MGO).

The effect of the IMO regulation at the beginning of the year appears to be somewhat delayed. This is because the diesel margin has not yet improved due to the inventory of low-sulfur fuel oil accumulated since the second half of last year. Hwang Yusik, a researcher at NH Investment & Securities, explained, "Although the prices of ultra-low sulfur fuel oil (VLSFO) and MGO, which are directly used as ship fuels, have risen significantly, the MGO market is still too small to move diesel prices, so it has not brought about a major change in diesel prices."

From March onward, as demand for low-sulfur fuel oil and marine diesel oil expands, inventory depletion is expected to occur, and refining margins are likely to gradually rebound. Lee Ji-yeon, a researcher at Shin Young Securities, said, "Recently, the spread price per ton between Singapore ultra-low sulfur fuel oil and high-sulfur fuel oil has risen 30% compared to early December last year, reflecting the increasing demand for low-sulfur fuel oil," adding, "Since the currently sluggish refining margin is unlikely to worsen further, the refining margin is expected to improve in the first quarter of this year, bottoming out in the fourth quarter of last year."

With the improvement in refining margins, earnings for the first quarter of this year are also expected to recover. According to financial information provider FnGuide, SK Innovation's sales for the first quarter of this year are estimated at 13.0994 trillion KRW, a 1.9% increase compared to the same period last year, and operating profit is expected to grow 3.4% to 342.4 billion KRW. During the same period, S-Oil's sales are expected to increase 17.0% to 6.3479 trillion KRW, and operating profit is forecast to rise 19.7% to 323.6 billion KRW.

This content was produced with the assistance of AI translation services.