Refiners' 'Processing Margins' Hit All-Time High... Boom for Domestic Refiners Set to Continue

The money made by converting crude oil into gasoline and other products (refining margin) hit an all-time high of $63 per barrel (approximately 89,000 won) last month. Securities firms predict that the trend of improving performance for domestic refiners will last longer than expected as product shortages persist. Lee Jin-myeong and Kim Myeong-ju, researchers at Shinhan Investment Corporation, stated in a recent report titled "A Boom Longer Than the War" that "profit expansion will continue based on elevated refining margins and cash flow." The report focused on the difference in the speed of normalization between the crude oil and refined product markets, rather than the war itself.

The expansion of refining margins is driven by a combination of factors: attacks on Russian refineries, reduced production in China, and peak seasonal demand from June to August. Inventory levels are also tight. Shinhan Investment Corporation researchers noted that U.S. gasoline inventories in July were at their lowest level since 2012. Crude oil and petroleum product inventories in the OECD are also at their lowest levels since April 2014. The researchers analyzed that if rebuilding inventories takes time, supply shortages could persist longer.

This trend also extends to international oil prices. As refiners increase product production to utilize high refining margins, demand for crude oil purchases rises. Hwang Byeong-jin, head of FICC Research at NH Investment & Securities, forecasted that "the positive profitability of refining companies signals high utilization rates and crude demand for the time being, which will likely control the pace of downward stabilization in international oil prices." In this regard, as the Strait of Hormuz stalemate continues, refiners in Korea, Japan, Taiwan, and India are increasing their purchases of U.S. crude as an alternative to Middle Eastern supplies.

Securities firms are also raising their outlooks for refining stocks. Samsung Securities researcher Cho Hyeon-ryeol recently raised S-Oil's target price from 150,000 won to 165,000 won. He explained that "the recent surge in refining margins in the Asian region and solid lubricant margins are mitigating some loss effects, while supply disruptions for fossil fuels like crude oil are likely to persist for a certain period even after the war in Iran ends."

Last week, on the London ICE Futures Exchange, October Brent crude futures closed at $88.52 per barrel (approximately 125,000 won), while on the New York Mercantile Exchange (NYMEX), September West Texas Intermediate (WTI) crude futures closed at $82.40 per barrel (approximately 117,000 won).