Unprecedented Negative Oil Prices Leave Refining Stocks in Distress

Sharp Drop in Oil Prices Leads to First Quarter Earnings Bomb... Difficult Improvement Expected in Second Quarter as Well

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] As international oil prices, which had been plummeting repeatedly, fell into negative territory for the first time in history, an emergency situation has arisen for the earnings of oil refining companies.

According to the securities industry on the 21st, oil refiners are expected to record operating losses in the first quarter, and improvement in second-quarter earnings has also become uncertain. Typically, it takes about a month from crude oil import to product production and sales. During this period, if oil prices drop sharply, raw material costs rise compared to a month earlier, while product prices fall due to the decline in oil prices, resulting in lower refining margins. The negative "lagging effect" (time lag effect of raw material input) increases losses. In addition, due to the continued sharp drop in demand caused by the novel coronavirus disease (COVID-19), inventory losses are steadily increasing.

Heungkuk Securities forecast that SK Innovation will record an operating loss of 973.1 billion KRW in the first quarter of this year, turning to a deficit compared to the same period last year. Wooje Jeon, a researcher at Heungkuk Securities, said, "Due to the impact of COVID-19, demand for jet fuel and gasoline has shrunk, coupled with the worst refining margins," adding, "Lagging losses due to the oil price drop are estimated at 400 billion KRW and inventory valuation losses at 413.2 billion KRW, and inventory valuation losses are expected to be 355.3 billion KRW in the second quarter as well, so losses will continue."

S-Oil is also expected to post gloomy results. It is expected to turn to an operating loss of 808.6 billion KRW in the first quarter compared to the previous year, and an operating loss of 216 billion KRW is estimated for the second quarter. The combined operating losses of the four refiners including GS Caltex and Hyundai Oilbank are projected to exceed previous estimates, reaching 2.5 trillion KRW in the first quarter.

Stock prices also could not avoid a downward trend. On the day, SK Innovation fell 3.74% from the previous day to 95,300 KRW shortly after the market opened. S-Oil also recorded about a 2.7% drop from the previous day to 65,000 KRW early in the session. The stock prices of these companies rebounded after hitting 52-week lows on March 19, when the crash continued last month, but have remained flat this month. This is interpreted as due to the difficulty in improving profitability, hampered by the sharp drop in oil prices.

Anna Lee, a researcher at Ebest Investment & Securities, said, "Although refiners are lowering refinery operating rates to below 85% and considering voluntary retirement, the uncertainty caused by the sharp drop in oil prices and demand decline is increasing, making large-scale losses inevitable," adding, "Poor earnings may continue until the second half of the year."

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