SK Innovation expects refining margins to gradually improve in H2
 |
| The logo of SK Innovation is seen in front of its headquarters in Seoul, South Korea, February 3, 2017. REUTERS/Kim Hong-Ji/File Photo |
Current refining environment
Low refining margins
Refining margins measure the profitability of turning crude oil into refined products like gasoline and diesel. Margins have plunged in 2022 due to a mismatch between refining capacity and fuel demand. The oversupply has limited refiners' pricing power and squeezed margins.
Oversupply and weak demand
While fuel demand has recovered from the lows of the pandemic, it remains below pre-COVID levels in many markets. Meanwhile, ample new refining capacity has come online, leading to an oversupplied market. With more fuel being produced than consumed, margins have deteriorated.
SK Innovation's outlook
Expects gradual recovery in H2 2022
Despite the challenging environment, SK Innovation believes refining margins have bottomed out and will start improving. The company expects a gradual recovery in the second half of 2022.
Anticipates demand growth in Asia
One factor giving SK optimism is recovering demand in Asia, especially for jet fuel as air travel recovers. SK sees Asian demand growth outpacing capacity additions in the region.
Plans to maximize utilization and optimize operations
To capitalize on improving conditions, SK plans to maximize utilization at its refineries in South Korea and Vietnam. It also intends to optimize operations to produce higher-value products.
Factors influencing margins
Crude oil prices
Crude oil price fluctuations directly impact refining margins. When crude prices fall, margins tend to compress as the input costs drop faster than finished product prices.
Regional demand and supply dynamics
Imbalances between fuel demand and refining capacity in different markets impact regional margins. Oversupply in one area can depress margins across interconnected regions.
Refinery configurations and utilization rates
Refineries optimized for gasoline see weaker margins when gasoline demand is low. Those running at lower rates have higher fixed costs per barrel, reducing profitability.
Strategies to improve margins
Flexible feedstock processing
Refineries capable of switching between different types of crude can take advantage of price differences to lower feedstock costs.
Focus on higher-value products
Boosting the output of products like low-sulfur diesel and jet fuel can enhance margins compared to just producing more gasoline.
Cost optimization
Controlling operating expenses through workforce optimization, preventive maintenance, and digitization can preserve margins.
Conclusion
Key takeaways
- Refining margins are under pressure globally but expected to recover gradually.
- SK Innovation plans to maximize operations to capitalize on improving Asian demand.
- Crude differentials, product imbalances, and flexibility are key margin factors.
Future outlook
With disciplined capacity growth and recovering demand, margins could return to more sustainable levels, but volatility is likely. Efficient, adaptable refiners like SK are best positioned to weather the fluctuations.
FAQs
What causes refining margins to fall?
Margins typically fall due to overcapacity leading to an oversupply of refined products that reduces prices and profitability.
How can refiners improve their margins?
Strategies include investing in flexible refineries, focusing on higher-value products, controlling costs, and optimizing operations.
What is the outlook for refining margins?
Margins are expected to gradually recover in 2022 as demand rebounds but significant volatility will remain. Oversupply issues may linger as well.
How does crude oil pricing affect refining margins?
Falling crude prices tend to compress margins in the short run as product prices drop more slowly. Rising crude can boost margins initially.
What factors are impacting fuel demand?
Demand is recovering from COVID lows but remains below pre-pandemic levels. Transportation and aviation demand growth will be key.
Post a Comment