Stock Prices Surge 34% This Month... Expectations for Oil Demand Recovery Amid COVID-19 Vaccine Development
International Oil Prices Also Soar... Q4 Expected to Record First Annual Surplus This Year
[Asia Economy Reporter Minwoo Lee] S-Oil, the leading company in the refining industry, is showing an upward trend despite the industry's downturn. Foreign capital is flowing in amid expectations that the 'dark period' caused by the novel coronavirus infection (COVID-19) will be resolved.
According to the Korea Exchange on the 25th, as of 9:10 a.m., S-Oil's stock price recorded 73,800 KRW, up 3.94% from the previous day. Following a 6.77% rise the day before, it showed another increase. Compared to the closing price of 55,000 KRW on the first trading day of this month, the stock has risen by more than 34%.
The inflow of foreign investors' funds is interpreted as the main driver of the price increase. Foreigners purchased 47.8 billion KRW worth of S-Oil shares the day before, ranking fifth among all net daily purchases. This is the largest daily net purchase by foreigners for S-Oil this year. Except for four trading days this month, foreigners have consistently bought S-Oil shares, accumulating a total of 108.8 billion KRW. This contrasts with the net sale of 450.6 billion KRW until last month this year.
Although the industry remains sluggish, the expectation of economic normalization due to COVID-19 vaccine development seems to be reflected. The recent industry condition is literally at a 'bottom' level. The breakeven point for the complex refining margin, considering energy costs, is estimated at around 5 to 6 dollars per barrel. Meanwhile, the domestic complex refining margin remains at about 1 dollar per barrel, continuing at a loss level. This is attributed to the continued weak demand for petroleum products, which has increased inventory. Minseok Won, a researcher at Hi Investment & Securities, explained, "U.S. demand for petroleum products has not yet recovered to pre-COVID-19 levels, and jet fuel demand is particularly weak. Diesel demand recovery is also delayed due to high inventory burdens in the U.S., Europe, and Singapore." The high operating rates of Chinese companies also pose a burden. Due to weak demand in the U.S. and Europe, exports have sharply declined, creating a supply-demand burden within the region.
Expectations are growing that this situation will be resolved with the expansion of COVID-19 vaccine distribution. If the vaccine receives emergency use approval within this year and is supplied in earnest from next year, the industry conditions for petroleum products are expected to gradually recover from the second half of next year. International oil prices are also rising buoyed by these expectations. On the 24th (local time), West Texas Intermediate (WTI) crude oil for January delivery on the New York Mercantile Exchange (NYMEX) closed at 44.91 dollars per barrel, up 4.3% (1.85 dollars). This is the highest price since March 6, early in the COVID-19 crisis. Positive prospects for COVID-19 vaccine development and expectations for a smooth transition of power with U.S. President-elect Joe Biden are reflected in this rise.
Performance outlook is also bright. According to financial information provider FnGuide, the market consensus for S-Oil's fourth-quarter results this year is sales of 4.3182 trillion KRW and operating profit of 59.4 billion KRW. Although sales are still 33.32% lower compared to the same period last year, they have increased by about 10.7% from the previous quarter. Operating profit is expected to turn positive for the first time this year. Hyunryul Cho, a researcher at Samsung Securities, explained, "While steep profit generation in the refining sector is not expected, most global refining facilities have been shut down due to the COVID-19 pandemic, and pressure to reduce carbon emissions is increasing. This can contribute to further improvement in S-Oil's profitability after demand recovers."
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