Jeongyu4sa, Q3 Losses Total 1.4 Trillion Won... Will Q4 Bring Sunshine?

'Trump Election' Impact from the US Likely Limited

Due to inventory losses from the decline in international oil prices and the impact of exchange rate depreciation, the four major domestic oil refining companies recorded a combined loss of approximately 1.45 trillion KRW in the third quarter alone. The industry expects performance to improve in the fourth quarter, driven by economic growth expectations in the US and China and reduced supply in the sector.

On the 7th, a summary of the earnings announcements from the four major domestic oil refiners?SK Innovation, S-Oil, HD Hyundai Oilbank, and GS Caltex?showed that their combined operating loss in the third quarter reached 1.4592 trillion KRW.

On the same day, GS Caltex reported a consolidated operating loss of 352.9 billion KRW for the third quarter, turning to a deficit compared to the previous year. Notably, the refining segment posted an operating loss of 500.2 billion KRW. The company explained, "Due to the continued economic downturn in the US and China and the delay in OPEC+ production cut easing, oil prices and product spreads weakened, resulting in a swing to an operating loss compared to the previous quarter."

Oil Refiners' Losses Snowball to 1.45 Trillion KRW... Improvement Expected in Q4

Earlier, SK Innovation announced a consolidated operating loss of 423.3 billion KRW for the third quarter of this year, turning to a deficit compared to the previous year. The petroleum business alone recorded an operating loss of 616.6 billion KRW. S-Oil and HD Hyundai Oilbank also posted losses of 414.9 billion KRW and 268.1 billion KRW respectively during the same period, turning to deficits.

However, the industry expects gradual improvement in performance from the fourth quarter onward due to the recovery of Asian refining margins and increased demand. In a recent third-quarter earnings conference call, SK Innovation stated, "Although concerns about a global economic recession persist regarding oil prices, we expect the bottom of oil prices to be supported by the sustained robust economic growth in the US and expectations for China's proactive economic stimulus policies."

S-Oil also explained in a recent earnings conference call, "In China, quotas exceeding last year's total allocation of 40 million tons have been assigned until recently," adding, "Considering the recent low export economics, the possibility of additional quotas being granted this year is limited." They further stated, "The likelihood of margin downward pressure due to an expansion of China's currently reduced export volume is quite low," and forecasted, "Asian refining margins will also gradually recover amid a demand and supply environment expected to improve progressively."

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Trump-Induced Increase in Fossil Fuel Production Expected... Impact Limited

With former US President Donald Trump potentially returning to power, the US is expected to shift its energy policy focus from green energy to fossil fuels. If the US actively pursues fossil fuel development, expansion, and infrastructure construction, increased US crude oil supply could lead to a decline in international oil prices. Previously, concerns over demand slowdown due to weak US manufacturing and employment caused Dubai crude oil prices to fall to an annual low of $71 per barrel in September. A sharp drop in oil prices could inevitably lead to additional losses for refiners depending on inventory size.

On the other hand, expectations that direct and indirect regulations on fossil fuel use will ease mean that Trump's return to power could act as a medium- to long-term positive factor for the industry’s supply and demand balance.

However, the industry consensus is that the overall impact of the US presidential election results on the global oil market will be limited. Lee Dong-wook, an analyst at IBK Investment & Securities, said, "The impact of the (US) president's policies on oil and gas production is often overestimated," adding, "Even though President Biden declared during the 2020 election that he would transition fossil fuel energy to clean energy, US crude oil production reached record highs during his term." He further noted, "Factors that had a greater impact on US oil production were supply-demand balance and external factors such as rising international oil prices rather than government policies."

Additionally, the electricity rate hike implemented last month is expected to somewhat burden future earnings. On the 24th of last month, the Ministry of Trade, Industry and Energy and Korea Electric Power Corporation raised industrial electricity rates by an average of 16.1 KRW per kilowatt-hour (kWh).

Electricity consumption in the refining sector is relatively high compared to other industries. S-Oil (3.8 billion kWh, based on last year), SK Energy, the refining subsidiary of SK Innovation (2.98 billion kWh), and GS Caltex (2.6 billion kWh) rank 8th, 9th, and 11th respectively in domestic electricity consumption. Based on last year's usage, an additional annual electricity cost of 40 to 60 billion KRW is expected, increasing electricity expenses by approximately 8 to 9% compared to previous levels.