"Q3 Earnings Improve, but Refining Industry Struggles with Negative Margins and Weak Demand"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The refining industry is on edge as the recovery in petroleum product demand is taking longer than expected, despite forecasts of improved third-quarter earnings. Although a turnaround to profitability is anticipated due to improved inventory valuation gains from the lagging effect (time lag in raw material input) caused by rising international oil prices, fundamental earnings improvement is deemed difficult if petroleum product consumption does not increase.

According to the Korea National Oil Corporation on the 28th, total domestic petroleum product consumption in June was 72.014 million barrels, down 8.8% compared to the previous month (May).

Specifically, consumption of major products all declined: diesel at 14.479 million barrels (-7.7%), gasoline at 7.115 million barrels (-7.1%), jet fuel at 1.7 million barrels (-6.4%), and naphtha at 33.62 million barrels (-5.7%). Compared to June last year, consumption of major products increased by only about 200,000 barrels, excluding jet fuel.

Crude oil imports last month also fell to 73.072 million barrels, marking the lowest level since May 2014 (72.672 million barrels). The decrease in domestic crude oil consumption and imports is due to reduced petroleum product consumption amid the COVID-19 pandemic, leading domestic and international refiners to lower refinery operating rates to around 80%. As a result, consumption of transport fuels such as diesel and gasoline dropped most sharply, and naphtha consumption, which is a raw material for petroleum products, also declined as refiners reduced operating rates.

Although the third quarter has begun, the trend remains bleak. While the COVID-19 situation is improving in Korea, the global cumulative confirmed cases have doubled to 16.5 million in six weeks. Consequently, the World Health Organization (WHO) is reconvening its emergency committee on the 30th, and forecasts suggest that global petroleum product demand recovery will not be easy.

Reflecting this situation, the Singapore complex refining margin in the fourth week of July recorded -$0.3. It was -$0.5 in the first week of July, $0.1 in the second week, and -$0.5 in the third week, resulting in an average refining margin of -$0.3 for July up to last week. Although the refining margin trend has improved compared to the second quarter due to rising international oil prices and a slight rebound in petroleum product consumption, it still falls short of expectations.

An industry insider said, "Movement restrictions in various countries continue, and with slow demand recovery, refining margins remain weak. Accurate forecasts will be possible only after the numbers show how much demand increased during the July, August, and September driving seasons (vacation periods)."

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