The Refining Industry Stretches to Recover Performance... Refining Margin Approaches $6

Refining Margin at $5.6 in Third Week of September
Oil Supply Decreases, Demand Rises Improving Refining Margin
Positive Earnings Signal... Increased Expectations for Second Half

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The refining industry is stretching out after overcoming the scars of COVID-19. The refining margin, which had been below the breakeven point (4-5 dollars per barrel), is now approaching 6 dollars. This is thanks to the significant reduction in supply as U.S. refiners halted operations due to the aftermath of Hurricane Ida, combined with increased vaccine coverage and the global economic recovery boosting oil demand.

According to the refining industry on the 27th, the Singapore complex refining margin in the third week of September was recorded at 5.6 dollars per barrel. This is the highest level in two years since the second week of October 2019 (5.8 dollars).

Refining margins, which plunged into negative territory immediately after the COVID-19 outbreak due to a sharp drop in demand, recovered to around 3 dollars per barrel earlier this year. Although it stagnated afterward, it surged to the 5-dollar range for two consecutive weeks in September, returning to pre-COVID-19 levels.

The clear upward trend in refining margins is due to reduced supply. Hurricane Ida made landfall in the northeastern United States, causing major refiners to halt operations, and the Chinese government reduced its export quotas for petroleum products to cut carbon emissions. Domestic refiners have maintained their facility operating rates in the low 70% range since COVID-19.

Meanwhile, oil demand is increasing, centered on transportation fuels such as gasoline and diesel. According to the International Energy Agency (IEA), global oil demand averaged 91.8 million barrels per day in Q2 2020, 91.4 million barrels in Q3 2020, 92.4 million barrels in Q1 2021, and 94.4 million barrels in Q2 2021. With vaccine coverage rapidly increasing mainly in developed countries in the second half of this year, oil demand is expected to recover to around 100 million barrels per day from Q2 next year. As jet fuel demand recovers in earnest, the rise in refining margins is expected to accelerate further.

Accordingly, the refining industry's performance in the second half of the year has also turned 'green light.' According to FnGuide, SK Innovation's estimated operating profit for Q3 is 465.9 billion won, and S-OIL's is 472.7 billion won, with a clear turnaround to profit compared to the same period last year. GS Caltex and Hyundai Oilbank are also expected to see operating profits rise compared to the first half of the year.