Refining Margin Turns Negative Again... On Top of That, China Increases Operating Rate

▲A view of the Nexlene plant within SK Innovation's Ulsan Complex, the largest oil refining company in Korea

[Asia Economy Reporter Hwang Yoon-joo] The refining industry, struggling with a sharp drop in oil prices and the resulting negative refining margins, is facing a triple crisis compounded by concerns over oversupply due to increased production in China.

According to the industry and consulting firm JLC on the 24th, the operating rate of refineries in China's Shandong region was 49% last week. This is more than 10 percentage points higher than the 37% recorded at the end of February, the lowest level in five years due to the COVID-19 pandemic. This week, as the COVID-19 situation in China gradually improves, the operating rate is expected to rise to around 57%.

The problem is that oil demand is decreasing in Europe and North America, the largest oil-consuming regions, due to the COVID-19 pandemic. Major global analysis institutions predict that if governments continue to implement logistics and population movement restrictions to curb the spread of COVID-19, oil consumption will decline at the largest scale in history.

Standard Chartered forecasted a daily oil demand decrease of up to 3.39 million barrels compared to last year, while Goldman Sachs projected a daily decrease of 8 million barrels. Giovanni Serio, head of research at oil trading firm Vitol, estimated that if the US and Europe enforce strict logistics and population movement controls, demand could drop by up to 10 million barrels per day. This scenario applies the situation in Italy, where 60% of public transportation was suspended and oil demand fell by 40-50%, to Europe and the US.

If annual oil demand decreases this year, it will be the first time since the 2009 global financial crisis. Domestic refiners have already lowered their facility operating rates this month. SK Energy reduced its rate to around 80%, GS Caltex moved up its regular maintenance schedule to March, and Hyundai Oilbank also lowered its operating rate to between 80% and 90%.

Meanwhile, refining margins have again turned negative, putting refiners in a position where the more products they sell, the more losses they incur. As of the third week of this month, refining margins recorded -$1.90. On the 16th, they hit -$2.48, the lowest daily average since 1997. Negative refining margins mean that gasoline prices have effectively become cheaper than crude oil prices. The industry views the breakeven point for refining margins at $4 to $5 per barrel.

In response to this situation, domestic refiners are holding daily emergency meetings to devise countermeasures. Hyundai Oilbank has entered emergency management, including executive salary returns. The emergency management system will include a 20% salary cut for all executives, including President Kang Dal-ho, and a reduction of up to 70% in expense budgets to eliminate unnecessary costs. S-Oil is promoting voluntary retirement for employees aged 50 and above.

Ham Hyung-do, a researcher at IBK Investment & Securities, said, "The first quarter is expected to inevitably result in losses due to worsening refining margins and inventory valuation losses. Performance improvement is expected only by the third quarter."

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