OPEC+ Effectively Maintains Production Cuts... Refining Industry Starts Performance Improvement

OPEC+ Increases Daily Production by 150,000 Barrels... Saudi Arabia Maintains Cuts
Refining Industry Expected to Return to Profit in Q1 Due to Lagging Effect

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The oil refining industry is relieved as the Organization of the Petroleum Exporting Countries and major oil-producing countries (OPEC+) have effectively maintained a production cut stance. With international oil prices rising in the first quarter of this year, OPEC+ is expected to minimize the increase in production to an average of 150,000 barrels per day, leading to an improvement in the profitability of the refining industry in the second quarter as well.

According to financial information company FnGuide on the 7th, SK Innovation and S-OIL are expected to record operating profits of 5.9 billion KRW and 173.1 billion KRW respectively in the first quarter of this year, marking a turnaround to profitability compared to the same period last year. In the first quarter of last year, the four major refiners recorded their largest-ever losses due to COVID-19. GS Caltex and Hyundai Oilbank are also expected to return to profitability.

The improvement in the refining industry's performance is attributed to the lagging margin effect caused by the rise in international oil prices, which reflects the benefit of using cheaper crude oil from the previous month in the current month. In fact, Dubai crude, which accounts for the largest share of domestic crude oil imports, hit a low of $50.50 (January 5) at the beginning of the year and has been on an upward trend, reaching $56.77 (February 2), $65.39 (February 25, the highest point this year), and $63.11 (March 4).

An SK Innovation official explained, "In the first quarter, as COVID-19 vaccinations began worldwide in a market with abundant liquidity, investment funds poured into oil prices, and Saudi Arabia's voluntary production cuts combined to cause a sharp rise in oil prices."

Refining margins have also stabilized in the mid-$2 range. In mid-February, some refineries in Japan faced operational disruptions due to an earthquake, and U.S. refiners halted operations due to a cold wave, which supported the profit increase of domestic refiners.

The refining industry expects profitability to recover in the second quarter as OPEC+ effectively maintains its production cut stance.

At the OPEC+ oil ministers' meeting on the 4th (local time), it was announced that only Russia and Kazakhstan would increase production by 130,000 barrels and 20,000 barrels per day respectively in April, while the other member countries would not increase production. This is far below the previously anticipated production increase of 500,000 barrels per day by the international oil market, and is interpreted as OPEC+ effectively maintaining its production cut stance until next month.

An industry official said, "Although COVID-19 vaccinations are underway worldwide, it is still too early to talk about a recovery in oil demand, and global refiners' operating rates are gradually increasing due to rising refining margins. Fortunately, with OPEC+ minimizing production increases, it is expected that the risk of oil price declines will be mitigated in the second quarter as well."