OPEC+ hike not entirely positive for South Korean refiners’ overall margins

South Korea's refining industry broadly expects the OPEC+ crude output hike to significantly enhance feedstock procurement economics, but faltering oil prices do not necessarily bode well for overall margins as refiners' product export earnings suffer and hedging costs rise.

While South Korea is Asia's third biggest crude buyer, it is also the region's top clean oil products and middle distillates supplier. OPEC+ members' recent decision to continue raising the group's crude production levels is highly positive for the broader Asian refining industry that relies heavily on Persian Gulf barrels but product export income and sales margins are under severe pressure as benchmark oil prices head lower towards the $60/b mark, refinery feedstock management sources and industry analysts said over May 1-6.

Lower oil prices do not necessarily work in favor of Asian refiners. A sharp decline in prices can negatively impact the valuation of feedstocks purchased and oil products produced weeks or months earlier, while hedging costs rise to cover the significant drop in outright settlement prices for forward-month oil and chemical product term and spot sales, according to feedstock managers and oil product sales executives at three major South Korean refiners including S-Oil.

Platts, part of S&P Global Commodity Insights, assessed the physical Middle Eastern sour crude benchmark Cash Dubai at $61.9/b on April 9, marking the lowest level since $61.55/b on April 13, 2021. Cash Dubai was last assessed at $62.02/b on May 2.

SK Innovation said its refining business in the first quarter suffered heavily due to the weakness in international oil prices and refining margins amid growing concerns about a global economic slowdown and the easing of production cuts by the OPEC+ members.

The country's top refiner posted sales of Won 11.9181 trillion ($8.5 billion) and an operating profit of Won 363 billion ($259 million) in the first quarter, a decrease of Won 306.1 billion ($219 million) in operating profit compared to the previous quarter.

"Although the paper hedging mechanism is covering our positions, it is never pretty to see crude oil you've bought at over $80/b a few months back falling to $60/b and product export prices trending lower," said a feedstock manager at a major South Korean refiner based in Ulsan.

Weak industrial and consumer demand fundamentals are hurting middle distillate crack spreads as well. Product sales margins are vulnerable to sluggish economic activity, the feedstock manager added.

Platts assessed the second-month Singapore gasoil swap crack against Dubai crude swaps at an average of $14.6/b so far in the second quarter, compared with $15.71/b in Q1.

Trade balance

The South Korean government also raised some concerns over the negative impact of faltering oil prices on Asia's fourth-biggest economy.

South Korea's oil product export value in April decreased by 14% from a year earlier to $3.72 billion due to the sharp downtrend in oil prices, according to the Ministry of Trade, Industry and Energy. The nation's total export value in April was $58.2 billion, with oil products contributing 6.4%.

Due to the decline in international oil prices and the continued global supply surplus, the South Korean oil product export unit price decreased by 8.5% compared with the same month last year, based on data for April 1-25, the Trade Ministry said in a statement.

Platts assessed outright FOB Singapore 92 RON gasoline at an average of $75.3/b in April, down sharply from the average of $102.13/b in the same month last year, and the March average of $79.56/b.

About 52.5% of the crude oil imported last year was refined and exported, marking the highest annual export share. The drop in international product prices is detrimental to South Korea's trade income and balances, according to Korea Petroleum Association.

"For highly export-oriented refiners, we support OPEC's prudent management of the group's supply levels as a sharp volatility in oil prices, especially to the downside, doesn't work well for both crude suppliers and end-users," a feedstock management source at another major South Korean refiner said.