[Corporate Inventory Alert] Buy When Cheap... As Oil Prices Fall, Refinery Stocks Also Accumulate

International Oil Prices Down 32% in 6 Months
Petroleum Product Inventory Up 12%
Anticipating Future Inventory Valuation Gains

[Asia Economy Reporter Choi Seoyoon] Amid the contraction of global petroleum product demand due to China's city lockdowns 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 a move to purchase crude oil at a lower price as international oil prices fell by 32% over six months due to the 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 $130 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 is 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 expected due to global economic recovery. However, related indicators are moving in a negative direction. The refining margin, directly linked to refiners' profitability, was $9.1 per barrel as of last month, sharply declining every month since June this year ($24.5). It has dropped 63% 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 achieved record-breaking performance in the first half of this year was also 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 crude oil drilling, a public underground resource. In Korea, a corporate tax law amendment bill has been proposed, mainly by opposition parties, to tax the excess profits of refiners who have "cashed in while sitting."

Some attribute the increase in crude oil imports to the rising demand for diesel, a substitute for natural gas. An industry insider said, "Increasing crude oil imports means that operating rates have increased, and the crude oil refining facility operating rate in July this year (83.6%) rose to the highest level in 30 months," adding, "Increasing diesel production to supply in preparation for the European energy crisis can be another source of profit for refiners."