South Korea's four major oil refiners are expecting combined first-quarter operating profit of around 5 trillion won ($3.7 billion), yet the industry is bracing for trouble. The strong results stem from a temporary surge in inventory valuation gains driven by soaring crude oil prices, while losses from the government's price ceiling program have already exceeded 3 trillion won.
According to the securities industry on the 3rd, the combined first-quarter operating profit of SK Innovation (096770.KS), S-Oil, GS Caltex, and HD Hyundai Oilbank is estimated to surpass 5 trillion won. Market research firm FnGuide projects SK Innovation's first-quarter operating profit at 2.4498 trillion won, a sharp turnaround and substantial expansion from the 44.6 billion won operating loss posted in the same period last year.
S-Oil is also estimated to have earned around 1.1 trillion won in operating profit in the first quarter. The industry expects GS Caltex and HD Hyundai Oilbank to post operating profits in the mid-1 trillion won range and around 200 billion won, respectively.
Analysts attribute the refiners' better-than-expected results to improved profitability from refining margins that surged after the U.S.-Iran war broke out in late February, along with a sharp increase in inventory gains from rising oil prices. The value of crude inventory that refiners had stockpiled before prices rose jumped sharply, reflecting the one-to-two-month lag between crude procurement and the sale of refined products.
Export profitability also improved dramatically on the back of refining margins that spiked after the U.S.-Iran war. The refining margin, calculated by subtracting crude prices and transportation and operating costs from product prices such as gasoline and diesel, is a key profitability indicator for refiners. The complex refining margin in the Singapore market surged to $16.5 per barrel in March from $5.7 in February, far exceeding the break-even point of $4 to $5. Leveraging their world No. 5 production capacity, Korean refiners directed 50 to 70 percent of their sales to exports, maximizing the benefits of higher refining margins.
However, observers say refiners' losses have surpassed 3 trillion won after the government implemented a price ceiling program on the 13th of last month, setting the maximum sale price of petroleum products below market levels to stabilize consumer prices and protect households. The government has allocated 4.2 trillion won in reserve funds to compensate the industry for its losses, but the funds are nearly depleted.
Moreover, if international oil prices turn downward, refiners will have to give back a significant portion of their first-quarter profits. To keep plants running, the industry has continued to sign contracts for high-priced crude. "On top of high exchange-rate risks stemming from the war, the business environment is deteriorating due to difficulties securing tankers and rising transportation costs," an oil industry official said. "The temporary surge in first-quarter profits does not properly reflect the industry's actual situation."
