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[Asia Economy Reporter Hwang Yoon-joo] As the 'May driving season' approaches, the oil refining industry, which had anticipated a normalization of demand, is on edge due to a series of adverse factors. With escalating tensions between the U.S. and Russia raising concerns over increased Russian oil production, combined with lockdown measures amid fears of a third wave of COVID-19 in Europe, unexpected variables such as a sharp drop in international oil prices have emerged.
On the 23rd (local time), West Texas Intermediate (WTI) crude oil for May delivery closed at $57.76 per barrel on the New York Mercantile Exchange (NYMEX), down 6.2% ($3.80) from the previous day. This is the lowest price since March 5. The plunge in international oil prices appears to be driven by renewed fears that the COVID-19 crisis will not subside easily, alongside concerns about increased Russian production.
Along with the sharp decline in international oil prices, refining margins, which had shown an upward trend earlier this year, have turned downward. According to the oil refining industry, last week’s Singapore complex refining margin stood at $1.70. The refining margin, a key indicator directly linked to refiners’ profits, had fallen into negative territory last year due to the impact of COVID-19 and the resulting drop in international oil prices. However, it recovered to $2.80 (fourth week of February) as COVID-19 vaccinations accelerated this year. Yet, with increased volatility in international oil prices this month, the margin has declined to $2.30 (first week of March) and $1.70 (second week of March).
Unlike the first and second quarters of last year, the oil refining industry had expected demand normalization starting from late May this year due to the 'driving season.' The 'driving season' refers to the period from May to September when demand for transportation fuels such as gasoline and diesel increases due to more suburban travel, summer vacations, and the Chuseok holiday season.
However, with refining margins faltering due to unforeseen variables, there are concerns that this could dampen the recent trend of improving earnings. Kim So-hyun, a researcher at Daishin Securities, analyzed, "While crude oil demand is gradually increasing during the economic recovery process, uncertainties related to COVID-19 still exist. The IEA’s forecast that the peak in crude oil demand could arrive sooner than expected due to strengthened environmental policies, along with sufficient oil spare production capacity centered on OPEC, could also limit the upper bound of oil prices."
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