Plummeting Oil Prices: The Whole Nation Smiles While Refiners Cry

This Year’s Petroleum Exports Expected to Reach About $50.6 Billion... 19.5% Decrease from Previous Year

Domestic oil refiners, which recorded the highest export revenue ever last year due to soaring oil prices, are expected to struggle this year. This is because international oil prices, which surpassed $120 last year, have remained between $70 and $80 so far this year. As the prices of petroleum products linked to oil prices have fallen, the decrease in export revenue is expected to reach about $12.3 billion (approximately 16 trillion KRW). While a drop in oil prices benefits the Korean economy, the refiners producing petroleum products are shedding tears.

On the 30th, the Korea Institute for Industrial Economics and Trade announced in its "2023 Second Half Economic and Industrial Outlook" that this year's refining export revenue is projected to be $50.68 billion, a 19.5% decrease from last year's $62.873 billion. This is a disappointing figure compared to last year's 71% increase, which marked the highest export revenue in 10 years. The forecasted export volume growth rate for this year is 1.8%, which is minimal compared to last year's 11.3%. In the second half of this year, both export volume (-1%) and export revenue (-22.5%) are expected to decline.

Similar forecasts have emerged from the securities sector. Hwang Kyuwon, a researcher at Yuanta Securities, said, "The refining industry is deteriorating significantly in the second quarter," attributing this to the increased burden of global refinery capacity expansions. New expansions by ExxonMobil in the U.S. (250,000 barrels), CNPC in China (400,000 barrels), and KPC in Kuwait (610,000 barrels) total 1.96 million barrels per day, while demand growth is only 1.4 million barrels per day. Yoon Yongsik, a researcher at Hanwha Investment & Securities, also noted, "Demand in major oil-consuming countries remains weak," adding, "China's manufacturing Purchasing Managers' Index (PMI) shifted back to contraction last month after four months, and cargo volumes have decreased." He further stated, "The possibility of OPEC further cutting supply is low, so improvements in oil prices or refining margins will be limited."

The sluggish export performance is largely due to the base effect from last year combined with simultaneous declines in export prices and refining margins. Export prices refer to the prices of petroleum products such as gasoline and diesel, which are linked to international oil prices. When oil prices rise, product prices also increase. Unlike last year, the low oil price trend has continued this year, causing export prices to fall. West Texas Intermediate (WTI) crude oil, which rose to 123.7 in March last year, dropped to 72.67 as of the 26th, a 41% decrease over about 14 months.

Cho Sangbeom, director of the Korea Petroleum Association, said, "Due to low oil prices, even if the same volume is exported, a decline in export revenue is inevitable." He added, "If the global economy is more sluggish than last year, oil demand will shrink and margins will decrease, forcing refiners to lower their operating rates. Ultimately, production volumes will decrease, which can also reduce export volumes."

Profits from refining imported crude oil into petroleum products, known as refining margins, have also fallen sharply. Last month, domestic refiners' refining margins were $3.5 per barrel, an 81.2% drop compared to $18.6 per barrel in April last year. The Korea Institute for Industrial Economics and Trade analyzed that "refining margins have declined as demand has stagnated due to economic recessions in advanced countries and weakening demand strength."

Due to sluggish exports, domestic refiners' performance this year is also expected to decline by around 40% compared to the previous year. According to financial information provider FnGuide, the operating profit of SK Innovation this year is projected to decrease by 44.9% to 2.1592 trillion KRW, and that of S-Oil is expected to drop by 41% to 1.9971 trillion KRW, based on data compiled from domestic securities firms.