🚨 Oil Prices Hit 4-Year Low: Korean Refining Industry Faces Profitability Crisis

Today Korean Economic News | 2025.04.09

📌 Margins Collapse as International Oil Prices Fall...Refining Industry Faces "Dark Clouds" in Performance

💬 International oil prices have hit their lowest level in four years, and refining margins have fallen below the break-even point, severely deteriorating the profitability of domestic refiners. With China's economic downturn, global oversupply leading to weak demand, and the failure to secure tariff exemptions for Canadian crude oil, the industry is expected to face significant performance challenges.

1️⃣ Easy to Understand

International oil prices have fallen significantly, and refining margins have decreased, causing difficulties for the domestic refining industry. Let me explain why this is happening and what impact it's having.

The refining industry imports crude oil and processes it into various petroleum products such as gasoline, diesel, and jet fuel for sale. The key factor determining profitability in this industry is the 'refining margin,' which is the difference between the purchase price of crude oil and the selling price of petroleum products. The higher the refining margin, the more profit refiners can make.

Recently, international oil prices have reached their lowest level in about four years since 2021, at around $60 per barrel. There are three main reasons for this price drop. First, demand has decreased due to the economic downturn in China, the world's largest crude oil consumer. Second, crude oil production continues to increase in the United States and OPEC+ countries, creating an oversupply situation. Third, energy transition policies, such as the expansion of electric vehicles, are reducing oil demand.

While falling oil prices are generally advantageous for refiners, petroleum product prices are currently falling even faster, significantly lowering refining margins. The Singapore refining margin (benchmark) is currently less than $1 per barrel, well below the general break-even point of $4-5 per barrel. This means refiners may actually lose money the more they operate their plants.

The failure to secure tariff exemptions for Canadian crude oil has also been a negative factor. If the Trump administration's proposed tariff exemptions on Canadian crude oil had been realized, Korean refiners could have secured cost competitiveness, but they did not receive this benefit.

If this situation continues, domestic refiners' operating profits for the second quarter are expected to decrease by 70-80% compared to the same period last year. Some companies may even record losses in their refining segments. Refiners are responding by lowering plant utilization rates or increasing production of more profitable petrochemical products.

In the long term, as carbon neutrality policies and the expansion of electric vehicles are expected to gradually reduce oil demand, the refining industry is seeking business diversification and transition to eco-friendly energy. In particular, investments are expanding to secure future growth engines such as hydrogen energy, battery materials, and biofuels.

2️⃣ Economic Terms

📕 Refining Margin

Refining margin is the difference between crude oil purchase price and petroleum product selling price, a key indicator of refinery profitability.

• The 'Singapore complex refining margin' is commonly used as a benchmark in the Asian region.
• Generally, $4-5 per barrel is considered the break-even point; profitability deteriorates if margins fall below this level.

📕 Brent Crude

Brent crude is oil produced in the North Sea and serves as an international benchmark for global oil prices.

• It is one of the world's three major oil benchmarks, along with WTI (West Texas Intermediate) and Dubai crude.
• It serves as the basis for oil pricing in Europe, Africa, and the Middle East regions.

📕 OPEC+

OPEC+ (Organization of Petroleum Exporting Countries Plus) is a cooperative body between OPEC member countries and non-OPEC oil producers like Russia.

• It accounts for about 55% of global crude oil production and has a significant impact on oil prices through production adjustments.
• Since its formation in 2016, it has coordinated production adjustment policies to prevent oversupply and stabilize oil prices.

📕 Utilization Rate

Utilization rate refers to the ratio of actual production to maximum production capacity of manufacturing facilities.

• For refiners, the utilization rate of crude distillation units (CDU) directly affects profitability.
• When refining margins are low, they adopt a strategy of lowering utilization rates to minimize losses.

3️⃣ Principles and Economic Outlook

💡 Structural Causes and Outlook for International Oil Price Decline

• Let's examine the background of international oil prices falling to their lowest level in four years and the future outlook.

  • First, China's economic downturn and reduced crude oil demand are major factors. The economic growth rate of China, the world's largest crude oil importer, was 4.5% in the first quarter of 2025, below the target of 5.0%. Energy demand is decreasing, particularly due to the real estate market downturn and weak consumption, with China's crude oil imports in March decreasing by 5.7% compared to the same month last year. As China accounts for about 15% of global crude oil consumption, reduced demand in China directly impacts global oil prices. The Chinese government has announced economic stimulus measures, but their effect is expected to be limited, and China's crude oil demand recovery is likely to be slow for the time being.

  • Second, global crude oil oversupply continues. U.S. shale oil production continues to increase due to technological advancements and production efficiency. In 2025, U.S. crude oil production is expected to reach a record high of 13.5 million barrels per day. Additionally, despite OPEC+ countries' agreement to reduce production, the actual implementation rate is only about 70%, and some member countries are attempting to increase production to secure market share. Russia, in particular, maintains its production levels by expanding exports to Asian markets despite Western sanctions. This oversupply situation is likely to continue for the time being, limiting oil price increases.

  • Third, accelerated energy transition policies are weakening long-term oil demand prospects. Major countries' carbon neutrality policies and the expansion of electric vehicles are factors reducing long-term oil demand. The International Energy Agency (IEA) has projected that global oil demand will peak around 2027 and then start to decline. This long-term outlook affects the sentiment of oil-related investors, creating a 'contango' phenomenon where long-term contract prices in the crude oil futures market are relatively low. As ESG investments expand and investment in the oil industry decreases, there is a possibility of structural changes in supply despite decreased demand in the long term.

  • Fourth, future oil price outlook is expected to show a gradual recovery. In the short term, low oil prices in the early $60s per barrel are likely to continue, but in the second half of the year, prices could recover to the $70 level due to increased summer holiday demand and potential additional production cuts by OPEC+. However, it will be difficult to return to the high prices above $100 seen in 2021-2022. Geopolitical risks, especially the expansion of conflicts in the Middle East, are factors that increase oil price volatility, but the possibility of supply disruptions is currently limited. Ultimately, the average price of Brent crude this year is expected to be in the range of $65-75 per barrel.

• The decline in international oil prices is the result of various factors acting in combination, including China's economic downturn, global oversupply, and energy transition policies. Particularly as structural factors are strongly at play, a return to high oil prices in the short term is unlikely. However, given the nature of oil prices, there still exists the possibility of expanded volatility due to geopolitical factors or unexpected supply disruptions. The refining industry needs to re-establish mid-to-long-term strategies based on the premise that this low oil price trend will continue for the time being.

💡 Causes of Refining Industry Performance Deterioration and Response Strategies

• Let's analyze the causes of the rapidly deteriorating performance of the refining industry and the industry's response strategies.

  • First, the sharp drop in refining margins is the direct cause of profitability deterioration. The Singapore complex refining margin is currently less than $1 per barrel as of April 2025, significantly below the break-even point of $4-5. This is markedly lower than the average of $8 in 2023 and $5 in 2024. The main causes of declining refining margins are weak petroleum product demand and China's expanded petroleum product exports. In particular, due to weak domestic demand after COVID-19, China significantly increased exports to maintain refinery utilization rates, leading to oversupply in the Asian petroleum product market. Competition intensified with the operation of new refining facilities in India and the Middle East, contributing to the decline in refining margins. With refining margins below break-even, domestic refiners have reduced refinery utilization rates to around 80%, but the effect on improving profitability is limited due to fixed cost burdens.

  • Second, the failure of Canadian crude oil tariff exemptions has also been a negative factor. Korean refiners had hoped for the Trump administration's policy to exempt Canadian crude oil from tariffs, but this policy ultimately failed. Canadian crude oil could have been supplied 3-5 dollars cheaper than American crude, which would have helped secure cost competitiveness if tariff exemptions had been realized. However, with these expectations dashed due to U.S. domestic industry protection policies, domestic refiners now need to find alternatives for cost reduction. Additionally, the possibility of increased tariffs on Korean petroleum products by the Trump administration has recently emerged, increasing uncertainty regarding exports to the U.S. market.

  • Third, the refining industry is exploring various response strategies. In the short term, they are focusing on defending profitability through adjusting refinery utilization rates, diversifying crude oil import sources, and expanding the proportion of high-value-added products. Some refiners are expanding production conversion to more profitable petrochemical products and increasing their share in the domestic market. They are also implementing cost reduction through emergency management systems and optimizing inventory management. In the medium to long term, they are pursuing business diversification toward eco-friendly energy and reducing dependence on oil. Investments are expanding particularly to secure future growth engines such as hydrogen energy, battery materials, biofuels, and renewable energy. Companies are pursuing differentiated strategies: SK Innovation is focusing on batteries and battery materials, GS Caltex on biofuels and hydrogen, and S-Oil on petrochemical advancement.

  • Fourth, the outlook for the refining industry in 2025 is quite negative. Operating profits of major domestic refiners in the second quarter are expected to decrease by 70-80% compared to the same period last year. Some companies may record losses in their refining segments, and annual performance is expected to decrease by more than 50% compared to the previous year. While there may be some recovery in the second half of the year due to increased summer demand and a slight rebound in oil prices, overall improvement in refining margins is expected to be limited. However, relative resilience in the chemical sector and domestic market, along with growth in electric vehicle battery-related businesses, may partially offset the performance decline. Investors' attention is expected to focus on long-term business portfolio restructuring and strategies for transitioning to eco-friendly energy rather than short-term performance of each company.

• While the main causes of the refining industry's performance deterioration are external environmental changes such as low oil prices and declining refining margins, structurally, it is also connected to the fundamental change of the energy transition era. While efforts for short-term performance defense are important, in the long term, business structure innovation in response to the move away from oil will be an even more important task. In particular, a balanced strategy is required that both utilizes existing refining and petrochemical capabilities while accelerating the transition to eco-friendly energy.

💡 Future Energy Industry Changes and Long-term Strategies for the Refining Industry

• Let's explore long-term strategies that the refining industry should consider in the era of carbon neutrality and energy transition.

  • First, business portfolio restructuring is necessary to respond to structural changes in oil demand. According to International Energy Agency (IEA) projections, global oil demand is expected to peak around 2027 and then gradually decrease. In particular, demand for traditional transportation fuels such as gasoline and diesel is expected to decrease more rapidly as electrification of the transportation sector accelerates. Meanwhile, demand for petrochemical feedstocks, jet fuel, and marine fuels may decrease relatively slowly or even increase in some cases. In response to these changes, the refining industry needs to gradually shift its business portfolio from traditional fuel production to petrochemicals, specialty products, and eco-friendly alternative fuels. Integration with the petrochemical sector is a key strategy for refiners, enhancing profitability through expansion of the value chain from crude oil to final chemical products.

  • Second, entry into eco-friendly energy fields and business diversification are important. Major domestic refiners are already pursuing business expansion into eco-friendly energy fields such as hydrogen, battery materials, renewable energy, and biofuels. Hydrogen energy, in particular, is a field that can create synergy with existing refining infrastructure, offering business opportunities across the value chain, including hydrogen production, distribution, and refueling stations. The battery materials business can also utilize refiners' chemical capabilities and has high growth potential with the expansion of the electric vehicle market. Biofuels have high connectivity with existing refining businesses and low entry barriers in the short term. The important thing is to establish differentiated strategies that match each company's strengths and capabilities, focusing on securing competitiveness through selection and concentration rather than indiscriminate diversification.

• Despite short-term performance challenges, the refining industry must proactively respond to the inevitable change of energy transition from a long-term perspective. This is both a crisis and an opportunity, and a balanced strategy is important to maintain the competitiveness of existing businesses while securing future growth engines. A gradual transition should be pursued around areas where accumulated technological capabilities and infrastructure can be utilized, with a phased approach considering investment capacity. Ultimately, the key to successful transition lies in the balance between securing stable cash flow from existing oil businesses and appropriate resource allocation to future businesses.

4️⃣ In Conclusion

International oil prices have hit their lowest level in four years, and refining margins have fallen below break-even point, leaving the domestic refining industry facing serious performance challenges. This is attributed to multiple factors including China's economic downturn, global crude oil oversupply, and weak petroleum product demand. Refining margins have significantly deteriorated, particularly due to China's expanded petroleum product exports and intensified competition from new refining facilities in the Asian region.

Operating profits of major domestic refiners for the second quarter of 2025 are expected to decrease by 70-80% compared to the same period last year, with some companies potentially recording losses in their refining segments. The failure of Canadian crude oil tariff exemption policies and the possibility of increased U.S. tariffs are also negative factors.

To respond to this crisis, the refining industry is focusing on defending profitability in the short term through adjusting refinery utilization rates, expanding high-value-added product production, and reducing costs. In particular, they are expanding production conversion to the relatively profitable petrochemical sector.

In the long term, business portfolio restructuring is inevitable to prepare for the structural decrease in oil demand. Domestic refiners are pursuing business diversification into eco-friendly energy fields such as hydrogen energy, battery materials, biofuels, and renewable energy, with each company establishing differentiated strategies.

The current difficulties in the refining industry are connected not only to short-term market conditions but also to the structural change of energy transition. Therefore, both short-term performance defense and long-term business structure innovation are simultaneously required. Although oil demand is expected to gradually decrease due to carbon neutrality goals and the expansion of electric vehicles, if the refining industry successfully implements differentiated transition strategies utilizing existing capabilities, it can transform this crisis into an opportunity for new growth.