Refining Margins Soar, But Oil Companies Can't Smile (Comprehensive)

Middle East Crude Oil Surcharges Soar
If Saudi Raises OSP
Other Oil Producers Likely to Follow

Refiners Face Higher Costs
"Hard to Guarantee Strong Q2 Earnings"

Abdulaziz bin Salman Al Saud, Saudi Arabia's Minister of Energy, is seen delivering a speech at an event held in Dubai, United Arab Emirates (UAE), on March 29 (local time). He pointed out that Russia produces oil equivalent to 10% of the world's daily consumption and warned that if the stability of oil supply is threatened, the global economy will face difficulties. (Photo by AP Yonhap News)

[Asia Economy Reporter Moon Chaeseok] As the premium price attached to Middle Eastern crude oil soars, concerns are rising over 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 surged 2 to 3 times compared to March. Specifically, Arabian Super Light (ASL) rose 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 from the first quarter, when refining companies performed well thanks to the Singapore complex refining margin, is being sensed in the refining industry. According to securities firms 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 left after refiners sell 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 pricing power for OSP, 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 crude oil accordingly. Refiners' cost burdens inevitably increase. A representative from the Korea Petroleum Association said, "Due to the sharp rise in OSP, the actual margin (profit) of refiners may decrease, so even if the refining margin has risen, it is difficult to guarantee strong performance in the second quarter," adding, "Profitability may even decline."

Another unwelcome 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 rise in oil prices in the second quarter (compared to April and June) is expected to be smaller than in the first quarter (compared to January and March), 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 time and the delivery time to some extent.

As long as geopolitical risks persist, it is difficult to be free from concerns about supply reductions. 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 amid falling demand and supply of petroleum products and international oil prices. 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 may disappear in the second quarter," adding, "If this happens, refiners' performance may decline."

On the other hand, some in the financial market are optimistic that Saudi Arabia may raise OSP next month and that strong refining margins may continue. Yoon Jaesung, a researcher at Hana Financial Investment, said, "Considering the arrival of the US summer vacation 'driving season,' the start of jet fuel demand improvement, and the recovery of (petroleum product) demand after China's lockdown lift, strong refining margins are expected to continue for the time being," adding, "According to Standard & Poor's (S&P), Saudi Arabia is expected to lower OSP by $4 to $6 per barrel compared to the previous month next month."

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