The oil industry is currently experiencing a somber atmosphere due to falling refining margins, which are a significant indicator of profitability for refiners.

This is in contrast to the record boom seen last year when strong refining margins and high oil prices led to reports of refiners preparing massive performance bonuses to share profits with employees, prompting calls for a windfall tax on refiners.

In 2022, the four major refiners — SK Innovation Co., GS Caltex Corp., HD Hyundai Oilbank Co. and S-Oil Corp. — posted trillions of won in operating profits, with cumulative operating profits of between 2-4 trillion won (US$1.50-3.00 billion) by the third quarter.

However, the refining industry’s first-quarter earnings are expected to not only sharply decline from the same period last year, but also worsen in second quarter.

Refining margins have fallen to around $2 for the first time in about six months, standing at US$2.50 as of March 19, the lowest level in a year.

Last year, the refining margins soared to an average of $29.50 in the fourth week of June, following the onset of Russian aggression in Ukraine.

Refining margins are equal to the price of the final petroleum product minus the cost of raw materials, including crude oil, with between $4-5 generally considered as the threshold for profit.

However, at the current $2 refining margin, running a plant means losing money.

The industry is concerned as international oil prices and refining margins are moving in opposite directions.

The recent announcement of the Organization of the Petroleum Exporting Countries (OPEC) Plus’ production cuts resulted in an increase in oil prices, while refining margins decrease.

Industry insiders have attributed the decline in refining margins to the prolonged global economic downturn, which has decreased the demand for petroleum products.

The refining industry needs increased demand to raise refining margins, but with only supply decreasing, demand is not rising.

The current situation of production cuts and rising oil prices amid a recession is not favorable for the refining industry and could result in negative outcomes for both refiners and chemical companies, as they must pay for crude oil but earn nothing.

Higher oil prices can be a “boomerang” effect that further depresses demand.

It is unclear how long weaker refining margins will last in the face of a prolonged recession.

The move to replenish the U.S. Strategic Petroleum Reserve and the arrival of the summer vacation “driving season” could be positive factors for the recovery of oil demand.

By The Korea Bizwire, May 4, 2023