"The Worst in Oil Refining Has Passed... Time to Wait for Recovery"

Expectations for Increased Gasoline Demand Ahead of Summer Peak Season
May Oil Price Surge of 88%... Largest Monthly Increase Ever
Domestic Refiners Estimated to Surpass Break-Even Point in Refining Margins in May

On the 10th, at a gas station in Eunpyeong-gu, Seoul, where the nationwide gasoline price has fallen for 15 consecutive weeks, gasoline is being sold at 1,184 KRW per liter and diesel at 1,018 KRW per liter, with the price of gasoline nationwide at the 1,250 KRW range per liter. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Minwoo Lee] An analysis suggests that the worst period for the petroleum refining sector, which is experiencing an unprecedented recession due to the impact of the novel coronavirus disease (COVID-19), has passed. This is because crude oil demand is gradually increasing and profitability is improving, even if only slightly.

On the 30th, Korea Investment & Securities maintained its 'overweight' investment stance on the petroleum refining industry sector. As a basis, it first pointed to the increase in U.S. crude oil inventories. Do-yeon Lee, a researcher at Korea Investment & Securities, explained, "U.S. crude oil inventories recorded 534 million barrels, a 2% increase compared to the previous week, putting a slight brake on the two-week continuous decline trend," adding, "This is because U.S. crude oil imports increased by 39% compared to the previous week." He continued, "Compared to the same period last year, it also increased by 5%, as Saudi Arabia’s crude oil export vessels concentrated on the U.S.," and added, "U.S. refiners needed to import heavy oil to balance their product mix." Meanwhile, U.S. crude oil production decreased by 1% compared to the previous week and by 7% compared to the same period last year. The crude oil input volume of U.S. refiners remained largely unchanged, down 23% compared to the same period last year.

The decrease in gasoline inventories and increase in demand pushed oil prices higher. On the 29th (local time), West Texas Intermediate (WTI) crude oil for July delivery on the New York Mercantile Exchange (NYMEX) closed at $35.49 per barrel, up 5.3% ($1.78) from the previous day. It rose 88% this month, marking the largest monthly increase on record. The previous record was a 44.6% rise in September 1990.

Researcher Lee analyzed, "Despite the increase in U.S. crude oil inventories and risk aversion due to U.S.-China tensions from a liquidity perspective, oil prices rebounded due to the decrease in gasoline inventories and increased demand," adding, "U.S. gasoline inventories slightly decreased to 255 million barrels, and demand increased by 7% compared to the previous week." Since gasoline accounts for an absolute share of U.S. crude oil demand, expectations for supply and demand improvement have grown entering the summer peak season. On the other hand, kerosene demand remained sluggish, decreasing by 11% compared to the previous week and 24% compared to the same period last year.

Profitability of domestic refiners is also improving. The average one-month lagged refining margin in May was $8.6 per barrel, improved from $8.1 last month. Considering the cost reduction effect due to the lowered Official Selling Price (OSP), it is estimated that most domestic refiners’ refining profitability began to exceed the breakeven point this month. Researcher Lee explained, "Concerns over U.S.-China tensions remain, but considering the unprecedentedly reduced demand and the production volume turning downward in response, the supply and demand improvement of crude oil and refined products is still valid," adding, "The worst point in the first quarter has already passed, and it is time to wait for recovery."