Is a 'Performance Rebound' Possible for the Refining Industry?

[Asia Economy Reporter Park So-yeon] As China expands its exports of petroleum products, analysis suggests that refining margins have failed to rebound in the second half of the year. The refining industry, which suffered massive losses in the first half due to worsening refining margins, is expected to face difficulties in improving performance in the fourth quarter as well.

On the 4th, Korea Ratings stated, "The downturn in the petroleum industry appears to be prolonged," adding, "The Asian region where domestic refiners export petroleum products has seen intensified supply-demand pressure due to China's new facility operations and increased supply."

Korea Ratings analyzed, "If the impact of COVID-19 prolongs and the negative supply-demand trend continues, it will be difficult to expect market improvement not only in the fourth quarter of this year but also next year," and noted, "It is uncertain whether petroleum demand can recover to last year's level."

They further explained, "Global energy and petroleum organizations such as the IEA (International Energy Agency) and OPEC (Organization of the Petroleum Exporting Countries) also believe that demand recovery will be difficult next year," and "They are closely monitoring the slower-than-expected pace of demand recovery."

In fact, the IEA projected global oil demand this year to be 91.7 million barrels per day, down by 8.4 million barrels per day compared to last year. OPEC also forecasted this year's oil demand to be around 90.1 million barrels per day, a decrease of 9.07 million barrels per day from last year.

Although a scenario was anticipated where demand would recover from the third quarter after bottoming out in the second quarter, the seasonal peak for petroleum product consumption such as gasoline ended in September, and the resurgence of COVID-19 could worsen the economy, leading to a downward revision of the forecast.

In particular, the IEA and OPEC predicted that transportation fuels such as gasoline, diesel, and jet fuel, which significantly contributed to refiners' refining margins, will decrease by 12% this year compared to the previous year. They expect that only about 50% of this year's reduced volume will recover next year.

Korea Ratings mentioned that China is putting a brake on the recovery of the petroleum market. They pointed out that despite COVID-19, China undertook large-scale capacity expansions and maintained an operating rate of about 80% despite weak refining margins, which was problematic.

They also noted a bigger issue is that China increased supply-demand pressure by expanding petroleum product exports. Until now, the Chinese government only allowed state-owned refiners to export petroleum products, but in the first half of this year, export quotas were also granted to private refiners.

According to Chinese government announcements, China's petroleum product exports increased by 15.1% from January to April and by 14% from January to August compared to the previous year. This increase occurred during a period when global petroleum product demand was significantly contracted, meaning exports were increased rather than reduced.

As a result, petroleum product inventories at the Singapore oil hub have significantly exceeded the average of previous years. According to CEIC, a Hong Kong-based data company, inventories have been rising continuously since March this year and reached the highest level in nine years in August.

Korea Ratings analyzed that if China continues to export petroleum products like this, refining margin improvement will be difficult. They forecast that refining margins below the breakeven point will also make it difficult for domestic refiners to improve their fourth-quarter performance.

Korea Ratings evaluated, "In the fourth quarter of this year, there is a possibility of turning to operating profit on a quarterly basis due to profit generation in non-refining sectors such as chemicals and lubricants and partial reversal of inventory-related losses reflected in the first half, but growth will be limited."

They also predicted, "As the complex refining margin does not improve in the second half, pressure on diesel margins, which account for a large production share of domestic refiners, is intensifying," and "Considering the limited recovery of the petroleum market, an annual operating loss this year is inevitable."

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