[Click eStock] "S-Oil, Vaccine Optimism Sparks Full-Scale Rebound in Refining Market in Second Half"

Lubricant Oil, Chemicals, and Refining All Sailing Smoothly
Refining Demand Up with Expanded Vaccine Vaccination

[Asia Economy Reporter Minwoo Lee] As crude oil refining margins rise again, expectations for S-Oil's performance are swelling. With supply limited and vaccination rates accelerating, demand for refined oil is increasing. There are forecasts that future new business investments could also accelerate, leveraging strong performance in the second half of the year.

On the 15th, Korea Investment & Securities maintained its 'Buy' rating and target price of 130,000 KRW for S-Oil based on this background. The closing price the previous day was 100,500 KRW.

The refining market rebound is expected to gain momentum in the second half. In fact, refining margins are rising again. The short-term impact of increasing COVID-19 cases on economic activity is less than before. As vaccinations rapidly increase, demand for refined oil is growing. Additionally, the sharp rise in crude oil prices that increased cost burdens for refiners in Q2 has recently been adjusted. The decline in Official Selling Price (OSP) is also positive. As a result, Asian refining margins are reaching their highest levels since the COVID-19 pandemic.

The long-term outlook is also bright. Woo-un Choi, a researcher at Korea Investment & Securities, said, "Demand will quickly recover to pre-pandemic levels as industrial activity and mobility restrictions caused by pandemic lockdowns are lifted. On the other hand, supply has been significantly constrained due to years of underperformance and responses to the decarbonization energy transition, and especially because the Chinese government is strengthening regulations on its domestic refining industry, regional oversupply concerns will gradually diminish."

Accordingly, operating profit in Q3 is expected to exceed market expectations. The lubricant base oil and chemical sectors, which led the 'surprise performance' in Q2, are also expected to continue strong results. In the lubricant base oil business, as refining facility utilization rates rebound, the supply reduction effect enjoyed during the pandemic decreases, but structurally, demand for high-grade base oils is increasing more than that. Despite supply burdens from expansions, the chemical sector's propylene oxide (PO) spread remains relatively favorable. Researcher Choi explained, "With the recovery of the core refining business added, Q3 operating profit, excluding inventory-related gains, is expected to reach 521 billion KRW, a 22% increase from the previous quarter, which is 11% above market consensus."