[Crude Oil Price Plunge] Refiners Enjoying Record Profits... Hit Hard by Falling Oil Prices

International Oil Prices Turn Downward, '100 Dollar' Collapse
Production Cuts Likely Inevitable Amid Global Economic Slowdown Concerns

On the 24th, as domestic gasoline and diesel prices continue to decline for the third consecutive week due to the drop in international oil prices and the expanded effect of the fuel tax reduction, a major gas station in Seoul is selling gasoline at 1,939 KRW per liter and diesel at 1,969 KRW per liter. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Oh Hyung-gil] As international oil prices, which soared due to the Russia-Ukraine war, show a downward trend, concerns over poor performance are spreading even among oil refiners that recorded record-breaking results in the first half of the year.

The problem is that refining margins, which determine the profits of oil refiners, have recently plummeted sharply. Pessimism is prevailing as concerns over an economic recession grow, leading to expectations of reduced demand for petroleum products.

According to the industry on the 25th, international oil prices have fallen below the $100 per barrel mark since the beginning of this month. West Texas Intermediate (WTI) stood at $94.7 as of the 22nd, marking the lowest point since the Russia-Ukraine war began. This is a 23% drop compared to the year’s highest price of $123.7 recorded on March 8.

Dubai crude ($102.67) and Brent crude ($103.2) are also expected to soon fall below the $100 mark, showing a sharp downward trend since peaking in March.

The driving force behind the decline in international oil prices is interpreted as the impact of economic slowdown. Although the possibility of reduced crude oil demand is increasing, the supply situation from oil-producing countries has not changed significantly.

The Organization of the Petroleum Exporting Countries (OPEC) forecasted that the growth rate of oil demand next year will slow compared to this year. In its July Oil Market Report, it projected that oil demand this year will increase by 3.36 million barrels per day to 100.29 million barrels per day compared to last year, while next year it is expected to rise by only 2.7 million barrels per day to 102.99 million barrels per day.

In particular, as refining margins have deteriorated sharply, concerns over poor performance among oil refiners are spreading. As of the 21st of this month, the Singapore complex refining margin recorded $2.71, the lowest point of the year.

Refining margin is the margin obtained by subtracting raw material costs, including crude oil, from the final petroleum product price, and is generally considered to have a break-even point of $4 to $5.

The refining margin, which averaged $6.01 in January, rose to an average of $24.51 last month but has rapidly fallen to an average of $11.36 as of the 21st of this month.

If refining margins around $2 continue, domestic oil refiners are expected to inevitably reduce production. As a result, although they achieved their best-ever performance in the first half of the year due to high oil prices and ultra-strong refining margins, concerns are growing that second-half performance will fall short.

Oil refiners preparing to announce first-half results this week expect strong performance in the second quarter following the first quarter but are cautious about the second half. Hyundai Oilbank, which was preparing for an initial public offering (IPO) in the second half of this year, ultimately had to withdraw its listing plan considering this situation.

An industry official said, "Since international oil prices react sensitively to economic conditions, the recent decline in refining margins has been greater than expected," adding, "Whether this will enter a long-term downward trend remains to be seen for the time being."