'Refining Margin' Fluctuates in Prolonged Battle... Worst Case: Simultaneous Demand and Supply Contraction (Comprehensive)

Weekly Margin Fluctuation of $5 per Barrel
Impact of Prolonged War Amid Demand Decline
May Forecast Also Shows 'Reduced Operating Rate'

A resident of a village on the outskirts of Kyiv, the capital of Ukraine, sits in a daze in front of the ruins of their home after a Russian military bombing on the 20th (local time). (Image source=AFP Yonhap News)

[Asia Economy Reporter Moon Chaeseok] As the volatility of the Singapore refining margin, a profitability indicator for oil refiners, increases due to Russia's invasion of Ukraine, concerns within the industry are growing. Since international sanctions against Russia began in earnest this month, the weekly average margin fluctuation has reached around $5 per barrel, significantly higher than the usual range of $0.5 to $1 per barrel. The industry is considering whether to revise management decisions such as lowering plant operating rates and adjusting crude oil import volumes.

According to securities analysts' estimates disclosed by the refining industry on the 23rd, the margin for the third week of this month (14th-18th) was $7.76 per barrel, down $4.34 from $12.1 per barrel the previous week. The margin showed 'unpredictable levels' of volatility, moving from $5.7 per barrel in the first week of March to $12.1 in the second week and $7.76 in the third week. The margin is the amount left after subtracting crude oil prices and transportation/operating costs from the final petroleum product price, with $4 to $5 considered the breakeven point. From 2020 until September last year, it stayed below $6 per barrel but improved from the end of last year, contributing to refiners' return to profitability, and maintained a range of $6 to $7 per barrel until last month.

The situation reversed sharply after the Ukraine crisis. Refiners now face concerns about declining consumer demand due to the large fluctuations in margins combined with the sharp rise in prices of petroleum products such as diesel, kerosene, and gasoline. The nationwide maximum retail price of gasoline is approaching 3,000 KRW, and the price of diesel in Seoul has exceeded 2,000 KRW for the first time in 13 years and 8 months, all factors that could reduce demand.

At the beginning of the year, the industry expected global economic recovery to pre-COVID-19 levels, leading to increased demand for petroleum products, and thus expanded crude oil imports and plant operating rates. According to the Korea National Oil Corporation's oil price information site Petronet, the average daily domestic crude oil import volume in January was 94.792 million barrels, a 23.3% increase from 76.874 million barrels in the same month last year. The crude oil import volume for this month, reflecting the impact of the Ukraine crisis, is scheduled to be announced at the end of next month, with most forecasts predicting a sharp decline compared to January.

For refiners, a decrease in crude oil imports means a reduction in 'raw materials.' With raw material supply becoming unstable, a natural step would be to lower operating rates. This could lead to reduced product output and a worst-case scenario of declining performance. It typically takes refiners 2 to 3 months from crude oil import to actual procurement. Therefore, a decrease in crude oil imports in March is expected to translate into a drop in refinery operating rates by May. The industry is thus facing a situation where operating rates, which had been raised to the low 80% range before COVID-19, must be lowered again.

A bigger concern is the possibility of a prolonged 'supply reduction' coinciding with demand decline. Russia's invasion of Ukraine is evolving into a 'long-term, attrition war.' Military experts predict that if Russia engages in urban warfare in Kyiv, the capital of Ukraine, full-scale fighting could continue for at least two months. The possibility of deploying weapons of mass destruction cannot be completely ruled out, indicating a dire situation. The very fact that a 'May operating rate reduction' forecast is emerging shows that refiners do not expect a global demand and supply rebound anytime soon. An industry insider said, "If the war prolongs and both demand and supply decrease simultaneously, refiners will have no choice but to lower operating rates regardless of whether refining margins rise. Only when news of a ceasefire or end of the war in Ukraine is reported and signals of increased global oil demand are detected will the elevated margins translate into improved refiners' earnings."

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