Refiners' earnings outlooks bleak in Q2

SK Energy CLX in Ulsan / Courtesy of SK Innovation

By Lee Kyung-min

The earnings outlooks of local refineries are expected to be somewhat underwhelming in the second quarter, hobbled by weakening demand due to the global economic downturn, according to market watchers, Friday.

Supporting this projection are declining refining margins, defined as the difference in value between the final products produced by a refinery and the raw input materials including crude oil. Also at play is the dissipating impact of the unexpected continuation of high oil prices, more than a year after Russia's invasion of Ukraine, which sparked the energy crisis.

S-Oil, a petroleum and refining company, suffered a 61.3 percent year-on-year drop in first-quarter operating profit to 515.7 billion ($388 million).

The first quarter performance was an improvement from the previous three months when operating losses reached 160.4 billion won due to one-off factors, mostly sliding oil prices that caused the value of inventory products to fall, while storage costs rose.

The refinery logged sales of 9.1 trillion won in the January-March period, a year-on-year decrease of 2.3 percent and a quarter-on-quarter decrease of 14.3 percent.

SK Innovation, the energy affiliate of SK Group, registered an operating profit of 374.9 billion in the first three months of this year, down 77.3 percent from the year before.

Their quarterly decline is expected to be sharper in the April-June period, as indicated by refining margins plummeting to the $2 range in April, down from over $13 in January.

The April figure is far lower than the market consensus breakeven point range of between $4 and $5.

Market watchers say the industry's slowdown is attributable to weak diesel demand, due in large part to a decrease in the number of cargo trucks carrying goods to ports for shipping.

Over 70 percent of diesel is used by truckers, but not as many shipping orders are made due to the recent economic recession woes in Europe and the U.S.

The widespread negative sentiment will not be countered unless a faster-than-needed reopening of the Chinese economy follows. Summer vacation fuel consumption usually bolsters sales in the late spring through summer months, but not as many people are choosing to drive long distances so as to reduce spending.

Hi Investment & Securities researcher Jun Yoo-jin said the steady downtrend in refining margins is not showing any signs of bouncing back and will remain as they are for the next few months.

“Demand for gasoline is and will continue to be relatively strong, compared to diesel,” the researcher said in a report. “The second quarter performance will not be able to find momentum for growth easily, since their performance is closely tied to economic conditions and consumer sentiment, both of which are not turning around any time soon.”