Lower oil prices bode ill for South Korea’s top refiner SK Innovation Q2 earnings

South Korea's top refiner SK Innovation reported a Won 4.176 trillion ($2.98 billion) operating loss in the second quarter, primarily due to lower oil prices and resulting inventory valuation losses, though a recovery in refining margins is expected in the upcoming quarters, company officials and sales managers at its refining subsidiary said over Aug. 5-8.

In its latest earnings announcement for Q2, SK Innovation said its overall sales increased 2.7% from the same period a year earlier, but the operating loss was up by 810.9%. The downbeat performance is attributed to the decline in the oil business, as it reported Q2 sales of Won 11.1187 trillion (approximately $7.95 billion) and an operating loss of Won 4.663 trillion ($3.34 billion) in its refining, upstream and all other petroleum business activities.

Although refining margins showed signs of recovery throughout Q2 despite global economic uncertainties amid US tariff hikes, the sharp decline in oil prices and weaker local currency were detrimental, SK Innovation said.

Inventory valuation losses amounted to about Won 300 billion ($214.29 million), leading to a decrease in operating profit of Won 502.6 billion ($358.29 million) compared to the previous quarter.

Lower oil prices

Although South Korea is the world's fourth biggest crude importer, lower oil prices do not necessarily benefit its 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 SK Innovation.

Platts, part of S&P Global Energy, assessed the physical Middle Eastern sour crude benchmark Cash Dubai at $61.9/b on April 9 in Q2, marking the lowest level since $61.55/b on April 13, 2021. Cash Dubai was last assessed at $69.33/b on Aug. 7.

Platts also assessed outright FOB Singapore 92 RON gasoline at an average of $76.84/b in Q2, down sharply from the average of $82.96/b in Q1 and the 2024 average of $94.02/b. The outright Asian gasoline benchmark was last assessed at $76.23/b on Aug. 7.

Nearly half of the crude oil imported in the first half was refined and exported. The drop in international product prices is detrimental to South Korea's trade income and balances, according to analysts at the Korea Petroleum Association based in Seoul.

South Korea imported 507 million barrels of crude oil in the first six months, while refined product exports totaled 244.7 million barrels over the same period, latest data from state-run Korea National Oil Corp. showed. South Korea is Asia's biggest net exporter and supplier of clean oil products.

According to the Ministry of Trade, Industry and Energy, the export value of petroleum products fell 6.3% from a year earlier to $4.2 billion in July. It still accounted for nearly 7% of the country's total exports and ranked fourth among the main export items in terms of value.

The trade ministry explained that while export volumes slightly increased due to the rise in refinery utilization rates, the decline in international oil prices led to a drop in international petroleum product prices, causing the decrease in export value to persist.

Upbeat crack spreads

SK Innovation said the refining sector is poised for a recovery in cracks and overall margins, driven by increased demand for petroleum products during the summer and regional supply shortages.

In the lubricants sector, stable profitability is anticipated, bolstered by heightened demand from holiday driving and stockpiling ahead of hurricane season, which is expected to offset supply increases from major suppliers completing maintenance, a company official said.

"While there are temporary downward pressures on refining margins, we expect a favorable trend to continue," the company said in a statement.

"Since US tariff uncertainties are gradually subsiding, global trade and economic activities are expected to pick up again, leading to upbeat transportation and industry fuel sales outlook," said a middle distillate sales manager at SK Innovation.

Platts assessed second-month Singapore jet fuel crack swaps against Dubai crude swaps at an average of $18.03/b so far in Q3, compared with an average of $15.33/b in Q2 and $14.53/b in Q1.

In exploration and production, following the confirmation of additional crude oil reserves in Vietnam's 15-1/05 block, SK Innovation plans to drill three appraisal wells in the 15-2/17 block starting in Q3 to evaluate further business potential, a company official said.