South Korean refiners who had incurred record loss in the first quarter cannot expect any better results in the following quarter despite improvement in global oil prices unless fuel demand for international travel picks up.

The Singapore gross refining margin, a benchmark of profitability for crude refiners, registered negative $1.6 per barrel in the second week of May, according to the industry sources on Tuesday. The refining margin has remained in the negative territory for the ninth week in a row, the longest period ever.

Refining margin is the difference between the value of products produced by a refinery and the value of the crude oil used to produce them. A negative refining margin means that refiners would lose money for each production.

Korean refiners see $4 per barrel a break-even point and have been losing money since October last year. The margin worsened due to poor demand for jet and vessel fuel that largely makes money for refiners.

Domestic refiners suffered massive inventory loss in the first quarter this year as they were forced to sell refined products at cheaper prices. It typically takes about one month for Korean refiners to turn crude oil imported into refined oil products. If global oil prices drop during the period, local refiners end up selling refined products below crude prices.

SK Innovation Co. estimated 1.6 trillion won ($1.3 billion) loss for petroleum business alone in the first quarter ended March 31. Of this, 1 trillion won loss was related to inventory loss. Other refiner majors S-Oil and GS Caltex also had 70 to 80 percent of first-quarter operating loss incurred from inventory-related losses.

But a minus refining margin would take a bigger toll than inventory loss on refiners, said an industry expert.

Considering that Korea’s major four refiners refine 2.5 million barrels of crude per day and it takes about a month to get raw oil shipped, they would need to have 62.5 million barrels kept in inventory for average 25 days. If the global oil price falls by $1 during the period, Korean refiners would lose about 65 billion won just for maintaining inventory.

This also means that they would add 1 trillion won in profit if the refining margin rises by $1 a year or vice versa.

Experts estimate refining margin’s impact on refiner company’s earnings is at least 20 times bigger than global oil prices.

By Won Ho-sup and Cho Jeehyun

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