Operational Disruptions at Chinese Refiners
Rising Middle Eastern Demand Expected to Lower Prices
Significant Profit Improvement Projected for Korean Refiners Next Year
The United States and Europe are imposing sanctions on countries such as China, India, and Turkey that procure Russian crude oil in an effort to cut off funding for President Putin's war. This is because 25% of Russia's fiscal revenue comes from taxes on oil and gas companies.
On October 20, Hana Securities released a report titled "Blocking Putin Benefits Korean Refiners," analyzing that Korean refining companies are likely to gain indirect benefits as the United States and Europe expand sanctions on Russian crude oil.
Intensifying US and European Sanctions on Russian Crude Oil
Recently, US President Donald Trump pressured NATO member states, including Turkey, to completely halt imports of Russian crude oil. Trump has already imposed an additional 25% tariff on India, and announced last week that India has responded by pledging to stop purchasing Russian crude oil.
The United Kingdom has imposed sanctions on two Russian oil companies as well as Chinese refining and port companies that import Russian crude oil. In addition, according to the European Union's 18th sanctions package against Russia, starting in January next year, it will be prohibited to import, purchase, or transfer petroleum products refined from Russian crude oil in third countries.
Impact on Chinese and Indian Refining Companies
As part of sanctions on Chinese refiners using Russian and Iranian crude oil, the Rizhao Shihua crude oil import terminal-which accounts for 9% of China's crude oil imports-and certain vessels were blacklisted last week. As a result, there are concerns that some refineries operated by the state-owned company Sinopec near Rizhao Port in Shandong Province may face operational disruptions of up to 250,000 barrels per day. It has been confirmed that not only small-scale refiners, known as "Teapots," but also state-owned refiners could be affected. In addition to China, Indian refiners are also expected to face higher costs or operational disruptions compared to the past.
Yoon Jaesung, an analyst at Hana Securities, stated, "Sanctions on China and Iran will lead to stronger demand for alternative Middle Eastern crude oil, which will ultimately result in a rapid easing of production cuts and an expansion of market share by OPEC Plus (OPEC+, a coalition of 12 Middle Eastern oil-producing countries and 11 non-Middle Eastern producers). In this process, the Official Selling Price (OSP) for Asia, which is the official price applied by Middle Eastern oil producers when selling crude oil to Asian markets, will quickly decline, providing a cost-saving factor for refiners." As a result, the outlook is that the profitability of the Korean refining industry will improve significantly next year. Hana Securities selected S-Oil as its top pick.
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