Refining Margins Negative for 4 Consecutive Weeks... First Since 2014, Oil Refining Industry's Q2 Earnings Even More 'Bleak'

Successful OPEC+ Production Cut Agreement... Must Support Demand Recovery
Refining Industry Faces Downward Trend in Q2 Earnings

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The refining margin, which indicates the profitability of oil refiners, has recorded a negative value for four consecutive weeks. Although oil-producing countries have succeeded in agreeing on production cuts, analysts say it will be difficult for demand for petroleum products to recover in the short term.

According to the refining industry on the 13th, the Singapore composite refining margin for the second week of April was -$0.7. Following -$1.9 in the third week of March, -$1.1 in the fourth week, and -$1.4 in the first week of April, the margin remained negative for the fourth consecutive week.

This is the first time since Reuters began compiling related statistics in 2014 that the refining margin has been negative for four consecutive weeks. Although the negative margin narrowed in the second week of April, it is too early to breathe a sigh of relief.

This is because, despite OPEC+’s decision to cut production, the industry is experiencing an unprecedented 'consumption cliff.' To prevent the spread of the novel coronavirus (COVID-19), governments worldwide have implemented 'social distancing,' causing a sharp decline in demand for petroleum products. Transportation fuels such as jet fuel, gasoline, and diesel are representative examples.

Up to February this year (cumulative basis), domestic consumption of gasoline and diesel decreased by 5.94% and 4.68%, respectively, compared to the same period last year. It is estimated that the decline was even steeper in March. The demand reduction in Japan, where COVID-19 cases are rapidly increasing, as well as in Europe and the United States, is still in its early stages.

Accordingly, the operating losses of the four domestic refiners (SK Innovation, GS Caltex, S-Oil, Hyundai Oilbank) in the first quarter are expected to reach 2.5 trillion won, exceeding previous estimates. An industry insider explained, "Negative margins and a sharp drop in demand have overlapped, potentially resulting in losses in the trillion-won range."

The outlook for the second quarter is even bleaker. Market experts have begun to downgrade the second-quarter earnings forecasts for domestic refiners such as SK Innovation and S-Oil. Yoon Jae-sung, a researcher at Hana Financial Investment, analyzed, "Considering inventory-related losses and poor refining margins, operating losses are inevitable in the second quarter as well." Kim Jung-hyun, a researcher at Kyobo Securities, also predicted, "Assuming an average Dubai crude oil price of $30 per barrel and a lagging refining margin improvement of $6 compared to the previous quarter, losses will continue in the second quarter."

Another refining industry insider said, "The previous pattern where refining companies’ performance improved as consumption increased when international oil prices plummeted is no longer working," adding, "The decline in demand from Europe and the United States, which drive global consumption, and the uncertain outlook for demand recovery are the most worrisome factors."

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