Improved margin raises expectations for earnings rebound at Korean refiners

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Oil refining margin, a key indicator of refiners’ profitability, has rebounded to above $10 per barrel for the first time in six months, raising expectations of improved third-quarter earnings for South Korean refiners.

According to the oil industry on Tuesday, the refining margin rose to up to $11.5 per barrel in the first week of August, up sharply from the $2 range earlier in the year.

Refining margin serves as an indicator of the profit generated from refining one barrel of crude oil and selling products such as gasoline, diesel, and aviation fuel.

Generally, the break-even point to avoid losses is considered to be around $4 per barrel.

A higher refining margin translates to greater profit for oil refiners. In the second quarter of last year when oil refiners posted earnings surprises, the average refining margin hovered around $20 per barrel and even briefly reached $30 in June.

The surge in refining margin is attributed to the escalation in oil prices during the holiday season.

“In the third quarter, demand typically surges due to the holiday period in the U.S., which constitutes one-third of the global gasoline demand,” said an unnamed industry insider. “Recent increases in oil prices have further bolstered refining margins.”

The third quarter typically sees heightened demand for aviation fuel and gasoline, coinciding with the July-August summer season in the densely populated northern hemisphere.

The recent breakthrough of $80 per barrel in oil prices is also expected to have a favorable impact on oil refiners.

The price of benchmark Dubai crude rose to $87 per barrel on Friday.

Korean oil refiners, however, did not benefit from the favorable developments in their second-quarter performance because of the delayed economic recovery and low refining margins.

GS Caltex Corp. announced on Tuesday that it posted sales of 10.77 trillion won ($8.2 billion) in the second quarter, down 33 percent from a year ago. Operating loss also reached 192 billion won in the April-June period versus an operating profit of over 2 trillion won in the same period last year.

“Due to the steady demand for transportation fuels, there is a high possibility of short-term improvement in performance,” said an official from the company.

Lotte Chemical Corp. also announced Tuesday that it recorded sales of 5.24 trillion won and an operating loss of 770 billion won in the second quarter. Sales were down by 5.9 percent and the operating loss widened by 29.6 percent.

“The recovery of upstream industries is delayed and it is difficult to resolve the overproduction occurring in China in a short period of time,” said an unnamed insider from the petrochemical industry. “Due to this, a clear performance improvement in the latter half of the year is unlikely.”