Refining Margins Rise but Crude Oil Premium Prices Also Increase... "Cannot Guarantee Strong Earnings"

Key Profitability Indicator at $20 per Barrel

Middle East Crude Oil Premiums Surge
If Saudi Raises OSP,
Other Oil Producers Likely to Follow

Refiners Face Rising Costs
"Strong Q2 Performance Not Guaranteed"

Crown Prince Mohammed bin Salman of Saudi Arabia. (Photo by AFP Yonhap News)

[Asia Economy Reporter Moon Chaeseok] As the premium price attached to Middle Eastern crude oil soars, concerns are rising about the potential decline in refining companies' profitability in the second quarter. Although the key profitability indicator, the refining margin, has surged to an all-time high of $20 per barrel, cost burdens are also increasing accordingly.

According to Aramco on the 4th, the official selling price (OSP) of Middle Eastern crude oil in Asia this month has risen 2 to 3 times compared to March. Specifically, Arabian Super Light (ASL) increased from $5.45 to $10.85 per barrel, Arabian Extra Light (AXL) from $3.6 to $9.6, Arabian Light (AL) from $2.8 to $9.35, Arabian Medium (AM) from $2.75 to $9.3, and Arabian Heavy (AH) from $1.4 to $7.95, respectively.

Due to the sharp rise in OSP, a different atmosphere is being sensed in the refining industry compared to the first quarter, when refining companies' performance was strong thanks to the Singapore complex refining margin. According to the securities industry on the same day, the Singapore complex refining margin in the first week of this month reached $20.04 per barrel, marking the first time since statistics began in 2000 that it hit the $20 range. The refining margin is the profit margin refining companies earn by selling gasoline, diesel, and kerosene products refined from crude oil, and is considered a representative profitability indicator. The breakeven point is known to be around $4 to $5 per barrel.

The problem is that oil-producing countries such as Saudi Arabia, which hold the authority to set OSP prices, are unlikely to lower OSP easily due to risks such as Russia's invasion of Ukraine. OSP is a value added to benchmark crude oil prices in each region, such as Dubai crude, West Texas Intermediate (WTI), and Brent crude, and while it can sometimes be a discount, currently the premium scale is increasing.

If Saudi Arabia raises the OSP, other oil-producing countries are also likely to raise the OSP for their own crude oil accordingly. Refining companies' cost burdens will inevitably increase. A representative from the Korea Petroleum Association said, "Due to the sharp rise in OSP, the actual margin (profit) of refining companies may decrease, so even if the refining margin has risen, it is difficult to guarantee strong performance in the second quarter," expressing concern that "profitability could rather decline."

Another unwelcome piece of news for refiners is that international oil prices, which have been volatile due to the 'Ukraine crisis,' remain in the low $100 range (WTI closed at $102.41 per barrel on the 3rd). The increase in oil prices in the second quarter (June compared to April) is expected to be smaller than in the first quarter (March compared to January), causing refiners to worry about negative inventory-related profits. When oil prices (costs) rise during the 3 to 6 weeks (4 weeks for the Middle East) it takes to bring crude oil into the country, inventory-related profits increase. This reflects the cost increase (or decrease) between the contract date and the delivery date to some extent.

As long as geopolitical risks persist, concerns about supply reductions are hard to avoid. Despite the endemic phase of COVID-19, there are continuous concerns about demand decreases due to downward revisions in economic growth rates. For refiners, the worst-case scenario is overlapping cost burdens while both demand and supply of petroleum products and international oil prices decline simultaneously. An industry insider said, "Since international situations have not yet been resolved, it is uncertain when oil-producing countries will raise OSP, and with the narrowing rise in oil prices, there is a possibility that first-quarter inventory-related profits will disappear in the second quarter," predicting that "if this happens, refining companies' performance may decline."

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