South Korea's refining industry is expected to continue significant performance improvements in the third quarter of this year. High refining margins are being sustained due to supply uncertainties in oil products stemming from the prolonged conflict in the Middle East, and profitability in lubricant oil has also improved. There are expectations that winter heating demand will support future performance. However, volatility in oil prices and issues surrounding compensation under the price cap system remain variables.
According to FnGuide on October 25, the combined operating profit forecast for SK Innovation's refining division, GS Caltex, HD Hyundai Oilbank, and S-Oil for the third quarter is estimated at 5.3112 trillion won.
SK Innovation's refining division is projected to have an operating profit of 1.3732 trillion won for the third quarter, marking a 139.4% increase compared to the same period last year. GS Caltex's operating profit is also estimated to rise by 269.6% to 1.375 trillion won. HD Hyundai Oilbank and S-Oil are expected to exceed 1 trillion won, with forecasts of 1.193 trillion won and 1.37 trillion won, respectively.
The improvement in performance is attributed to supply uncertainties in oil products due to the ongoing conflict in the Middle East. The war has caused disruptions in refining operations, leading to tight supply of key oil products and maintaining high refining margins. Even if crude oil supply increases, the inability to normalize facilities that process it into gasoline and diesel makes it difficult to rapidly expand product supply. These supply constraints are supporting the profitability of domestic refiners.
Profitability in lubricant oil is also contributing to the gains. For GS Caltex, the operating profit from its lubricant business alone is estimated at 423 billion won for the third quarter. Together with the refining business's projected operating profit of 951 billion won, it is expected to drive overall performance.
The market is watching whether this trend will continue into winter. With the ongoing conflict in the Middle East and global gasoline and diesel inventories down about 10% compared to late February, an increase in winter heating demand could tighten product supply further.
However, the supply uncertainties caused by the war present both opportunities and burdens for the refining industry. While they increase oil product margins, they can also raise costs for crude oil imports and transportation. A sharp drop in oil prices could also shake profitability. Since there is a lag between crude oil purchases and product sales, expensive crude oil can affect cost calculations, and losses related to inventory can diminish the benefits of improved refining margins.
There remains the issue of compensation under the price cap system in South Korea. The government has proposed a cost-based settlement policy, but the industry insists that the difference between international oil product prices and domestic supply prices must be reflected. Since the scale of compensation varies depending on the settlement criteria, it remains uncertain how much of the losses incurred due to price controls will be compensated despite improvements in the market.
A representative from the industry stated, "It is true that performance is improving due to strong refining margins amid the prolonged conflict in the Middle East," but added, "With the implementation of the price cap and export restrictions, there is a significant possibility of a lagging effect after the war ends, making it difficult to remain optimistic based solely on current strong performance."
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.