Stretching Out... Refinery Utilization Rates Return to Pandemic Levels

September Average Factory Operating Rate at 80.4%
Down 5.9 Percentage Points from Previous Month
Combined Adverse Factors: Decreased Consumption and Refining Margin Decline

Citizens refueling at a gas station in Seoul last August. [Image source=Yonhap News]

[Asia Economy Reporter Choi Seoyoon] The operating rates of oil refineries have fallen to levels seen during the COVID-19 pandemic. This is due to a combination of adverse factors such as decreased consumption caused by the economic recession and a decline in refining margins, which are profitability indicators. Although there is cautious speculation about a recovery in performance in the fourth quarter, the growing economic uncertainty is interpreted as a return to a cautious management stance.

According to the Korea National Oil Corporation on the 8th, the average operating rate of domestic oil refineries in September was 80.4%, down 5.9 percentage points from the previous month. This is the lowest level in nine months since 78.7% in December last year. It fell to a level similar to 80.51% in February 2020, when the domestic COVID-19 pandemic began. Although it recorded an 80% operating rate for the first time in three years this year, after an annual average operating rate of 82.8% in 2019 before the COVID-19 outbreak, the cumulative rate from January to September dropped to 80%, making even this uncertain. The monthly average operating rate rose from 74.5% in June to 83.6% in July and 85.4% in August, but then declined again.

Generally, when oil prices rise and the economy is relatively strong, refineries increase their operating rates, but when oil prices fall and demand shrinks, they adopt a conservative stance. In fact, petroleum product consumption is slowing down. According to the Korea National Oil Corporation's monthly supply and demand statistics, domestic petroleum product consumption in September decreased by 7.8% compared to the same period last year, when economic activity was severely restricted due to COVID-19. Consumption of gasoline (-3.5%), diesel (-9.5%), and bunker C fuel oil (for ships, -10%) all declined.

The gap widens compared to the previous month. Consumption decreased by 11.5% in one month. Gasoline (-14.2%), diesel (-21.7%), bunker C fuel oil (-9.3%), and aviation fuel (-8.5%) all declined simultaneously. Crude oil imports also decreased. Crude oil imports in September were 85.61 million barrels, close to 79.284 million barrels in February when the Russia-Ukraine war broke out. After recovering to around 90 million barrels in July and maintaining 96.92 million barrels in August, imports fell back to the 85 million barrel range in September.

As global economic uncertainty intensifies, oil price volatility is also increasing. According to the New York Mercantile Exchange, West Texas Intermediate crude closed at $90 per barrel on the 2nd (local time). UK Brent crude closed at $94.51. Although prices rose by over 1% compared to the previous day due to a decrease in US crude oil inventories and news of an imminent Iranian attack on Saudi Arabia, they fell by 3% and 4.6%, respectively, compared to February 24, when the Russia-Ukraine war began.

The problem is that the economic outlook is not promising. Oil demand has decreased, and a global economic recession is expected for the time being. The refining margin, a key profitability indicator, has fallen below the breakeven point. The refining industry generally considers the breakeven point for refining margins, which is the price of petroleum products minus crude oil costs and transportation expenses, to be around $3 to $4 per barrel. In the fourth week of last month, the refining margin was $2.6 per barrel. In the third week of September, it even plunged to zero.

Due to the decline in international oil prices and refining margins, the profitability of domestic oil refiners has also been cut by two-thirds. SK Innovation's operating profit in the third quarter decreased by 69.8% compared to the previous quarter, and S-Oil's operating profit during the same period also plummeted by 70.3%.

However, there are also forecasts that refining margins will rebound from the fourth quarter. Shin Moon-kwon, PL of Performance Management at SK Energy, said during the third-quarter earnings conference call, "In the fourth quarter, due to the impact of major process regular maintenance, the operating rate is expected to be in the high 80% range, slightly lower than the third quarter," adding, "Next year, a solid refining margin is expected, and the operating rate is projected to be in the high 80% to low 90% range."

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