[Corporate Inventory Alert] Buy While Cheap... As Oil Prices Fall, Refinery Stocks Also Accumulate (Comprehensive)

Economic Contraction... Uncertain Outlook for Stabilization Timing
Response to Increased Demand for Diesel as a Substitute for Natural Gas

A gas station in Seoul. [Image source=Yonhap News]

[Asia Economy Reporter Choi Seoyoon] Amid the contraction of global petroleum product demand due to factors such as city lockdowns in China caused by COVID-19, domestic refiners' inventories have significantly increased. Crude oil imports recorded the highest level in about 3 years and 7 months. This is interpreted as an effort to purchase crude oil at a lower price amid a 32% drop in international oil prices over the past six months due to global economic recession and a strong dollar. By buying crude oil cheaply and accumulating inventory, refiners can realize inventory valuation gains by selling at higher prices when demand recovers.

According to the Korea National Oil Corporation's PetroNet on the 16th, as of July, domestic petroleum product inventories stood at 71.78 million barrels, a 12.1% increase from 64.06 million barrels in the same period last year. Crude oil inventories also rose by 5.3% to 43.23 million barrels from 41.03 million barrels in the same period last year.

International oil prices, which had been soaring, have recently stalled. Due to supply reduction concerns following Russia's invasion of Ukraine, prices surpassed the $130 mark in March but fell back to the $80 range this month amid growing fears of an economic recession.

As oil prices declined, domestic refiners increased crude oil imports. In July, domestic companies imported 98.176 million barrels of crude oil, marking the highest level since February 2019. This represents a 32.6% increase compared to the previous month. Compared to 79.284 million barrels in February this year, when the Russia-Ukraine war broke out, it is a 23.8% increase.

Typically, refiners increase crude oil imports and raise operating rates to maximize profitability when demand recovery is anticipated due to global economic recovery. However, related indicators are moving in a negative direction. Refining margins, which directly affect refiners' profitability, dropped sharply every month since June this year, falling to $9.1 per barrel last month from $24.5 in June. This represents a 63% decline in the second half of the year alone. The refining margin in the first week of this month was only $8.4.

The reason domestic refiners posted record-breaking results in the first half of this year was due to the high oil price boom. In Europe and the United States, there have been movements to impose windfall taxes on energy companies that monopolize the extraction of crude oil, a public underground resource. In Korea, a bill to amend the Corporate Tax Act was proposed, mainly by opposition parties, to tax the excess profits of refiners who have "sat on a money cushion."

The outlook for the stabilization of international oil prices remains uncertain due to mixed factors affecting price fluctuations. The decline in the Official Selling Price (OSP) of Middle Eastern crude oil, which affects cost of sales, supports the expectation of falling oil prices. However, the possibility of an energy crisis in Europe during winter and supply instability caused by Russia's natural gas supply restrictions are driving oil prices up.

Some attribute the increase in crude oil imports amid this complex situation to rising demand for diesel, a substitute for natural gas. The International Energy Agency (IEA) forecasted that global crude oil demand will decrease in the fourth quarter due to economic downturns and China's economic slowdown but expects diesel demand for heating to increase this winter due to the surge in natural gas prices. In fact, refiners produced 32.82 million barrels of diesel in July alone, setting a record since the Korea National Oil Corporation began official statistics in 1992.

An industry insider said, "The increase in crude oil imports means that operating rates have risen, with the crude oil refining facility operating rate reaching 83.6% in July, the highest in 30 months," adding, "Increasing diesel production to supply in preparation for the European energy crisis can be another source of profit for refiners." Diesel accounts for about 30% of domestic refiners' sales.