Brent Oil Hits $90 Knock…"Positive If Not Excessively Volatile"

As Oil Prices and Refining Margins Rise, Global Demand Recovery Expected
December Refining Rate of 4 Major Companies at 78.7%... Approaching Pre-COVID 80% Range

[Asia Economy Reporter Moon Chaeseok] As Brent crude oil prices soar to $90 per barrel for the first time in over seven years, there are projections that this will have a positive impact on the earnings of domestic refiners. Until the end of last year, major domestic refiners raised their operating rates to just below the pre-COVID-19 level of the 80% range, anticipating demand recovery based on the rising oil price trend.

According to the industry on the 31st, on the 26th (local time), March Brent crude oil futures on the London ICE Futures Exchange reached an intraday high of $90.02 per barrel, marking the highest level in over seven years since October 13, 2014. Although the price increase is driven by geopolitical risks due to Russia's opposition to Ukraine's NATO membership, making it difficult to welcome the rise, the consensus is that the oil price increase is likely to act as a positive factor for refiners' earnings.

Exterior view of Nexlene factory within SK Innovation's Ulsan Complex. (Photo by SK Inno)

According to the industry, refiners purchase crude oil from overseas and operate their plants to produce petroleum products such as gasoline and diesel. When oil prices rise 'steadily,' it becomes easier to estimate demand and costs. Coupled with economic recovery, refiners increase their plant operating rates. If oil prices fluctuate wildly, operating rates must be adjusted frequently, but if prices steadily trend upward, it becomes easier to manage operating rates. An industry insider explained, "When oil prices rise, supply prices also increase, which helps improve refiners' profitability," adding, "Generally, the higher the prices of products newly produced based on crude oil, the more refiners' profits increase."

If refining margins also rise, refiners' earnings are likely to increase further. Refining margin is the amount left after subtracting crude oil prices and operating costs from the selling price and is a representative profitability indicator. According to the industry, Singapore complex refining margins have recovered to the breakeven point of around $4 to $5 per barrel. Last year's average was $3.7, and this month, the first week recorded $5.9, the second week $6.0, and the third week $5.5, all above $5. An industry insider said, "When refining margins are high and demand is maximized, refiners' profits increase," adding, "Unless the worst-case scenario occurs where global geopolitical risks such as war and pandemics simultaneously reduce supply, demand, refining margins, and oil prices, rising oil prices and refining margins often act as positive factors for refiners."

A Russian soldier is seen conducting machine gun firing training at the Golovenki training ground in the Moscow area on the 25th (local time). (Image source=AP Yonhap News)

With improving business conditions, the four major domestic refiners?S-Oil, SK Innovation, GS Caltex, and Hyundai Oilbank?are increasing their operating rates. According to the Korea National Oil Corporation, the operating rate in December last year was 78.7%, up 2.5 percentage points from 76.2% a year earlier. A representative from the Korea Petroleum Association said, "Since the second half of last year, as petroleum demand recovery became visible, domestic refiners' operating rates have shown a gradual upward trend," adding, "This year, the refining industry will contribute to increasing national exports by diversifying export regions and exporting high value-added products in line with the global increase in petroleum demand." According to export performance data for the four refiners released by the association on the 27th, petroleum product exports amounted to $33.23534 billion, a 54.6% increase from the previous year. This growth rate was the highest since 2011's 64.2%.

According to securities firms and the refining industry, the four companies' operating profits last year are expected to exceed 7 trillion won. On the morning of the 27th, S-Oil announced that its operating profit for last year turned positive compared to the previous year, reaching 2.3064 trillion won, with sales increasing by 63.2% to 27.4639 trillion won. This marked the highest operating profit since the company's founding. Net profit also set a record at 1.5001 trillion won. SK Innovation announced on the morning of the 28th that its operating profit for last year was 1.7656 trillion won, turning positive compared to the previous year. Sales also increased by more than 35% to 46.8429 trillion won. GS Caltex and Hyundai Oilbank are estimated to have recorded operating profits of about 2 trillion won and 1.2 trillion won, respectively. If these estimates hold, they will more than make up for the operating loss of about 5 trillion won recorded in 2020 during the COVID-19 pandemic. The four companies surpassing 7 trillion won in operating profit is the first time in four years since 2017 (7.7226 trillion won).

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