Although domestic petroleum product exports reached their second-highest level on record in March amid surging oil prices from the Middle East war, a sense of tension is palpable throughout the oil refining industry. Concerns are mounting that profitability could falter as a crude oil shortage looms for the second quarter.

According to industry sources on April 6, the export value of petroleum products such as gasoline, diesel, and naphtha last month was $5.105 billion, marking the second-highest figure for any March on record. This was driven by a sharp increase in the export unit price due to the surge in oil prices following the Middle East war. From March1 to 25, the export unit price for petroleum products was $925 per ton, a 33.3% increase compared to the same period last year.

The price of Dubai crude, which domestic companies primarily import, rose by 77.2%, from $72.5 per barrel in March of last year to $128.5 in March this year. During the same period, international gasoline prices increased by 61.8% from $79.6 to $128.8, and diesel prices surged by 122.9% from $86.5 to $192.8.

With this expansion in exports, the first-quarter performance of oil refiners is expected to improve. Domestic refiners operate on a model where they import all their crude oil, process it into high value-added petroleum products, and then export them. As of last year, the export share of the refining business for all four major refiners exceeded 50%. As overseas sales surpass domestic sales, export performance is expected to be reflected in their Q1 results.

However, the industry anticipates that the strong Q1 performance will be a one-off and has entered into emergency response mode. April, in particular, is considered the most vulnerable period of the second quarter. Until March, normal operations were possible as crude oil shipped before the Middle East crisis arrived sequentially. However, with new shipments blocked following the blockade of the Strait of Hormuz, the inflow of supplies transiting the strait ceased after the arrival of 2 million barrels on March 20. This has effectively created a gap in April arrivals.

The government has also stepped in to provide support. The Ministry of Trade, Industry and Energy raised the resource security crisis alert to the ‘Alert’ level and activated the strategic petroleum reserve (SPR) swap program. This measure allows refiners to borrow from the government’s strategic reserves to use for April operations, with the loan secured against alternative crude supplies scheduled to arrive in May and June. The Korea National Oil Corporation is also pursuing plans to bring its overseas production assets directly into the country.

Even if the war ends and maritime traffic resumes, normalization is expected to take time. This is because the cost burden will increase when crude oil purchased at high prices after the start of the war enters the production line. Even if international oil and product prices stabilize, margins could shrink again as the expensively bought crude is directly reflected in costs. Another burdensome factor is that if oil prices plummet, the appraised value of held crude oil will fall, leading to accounting losses.
An official from the oil refining industry said, “We managed to get by until March with previously secured supplies, but from April, securing crude oil itself has become the biggest challenge,” adding, “even if we bring in alternative crude, the transportation distance will be longer and a premium will be added, which will change the cost structure.”
Source: Business Korea