Shares of South Korea's major oil refiners jumped more than 10% after China suspended exports of refined petroleum products. Investors bet that tighter gasoline and diesel supply across Asia would widen refining margins.
S-Oil (010950) closed 11.69% higher in the regular session on the previous day, according to Korea Exchange data on the 3rd. SK Innovation (096770) ended up 10.32% at 154,000 won, while GS (078930) gained 4.11%. The moves outpaced the broader market, with the KOSPI closing 0.46% higher at 7,003.74.
The rally followed news that China had moved to restrict fuel exports. Chinese refiners have halted exports of gasoline, diesel and jet fuel this month to destinations other than Hong Kong and Macau in line with government policy, Reuters reported on the 1st.
Markets that had been supplied with Chinese products must now secure alternative volumes, giving Korean refiners a potential windfall from higher product prices. Refining margins, the key driver of refiner profitability, are the difference between the selling price of petroleum products and the cost of crude plus shipping and processing. If crude prices rise without a matching gain in product prices, margins can narrow.
The Chinese measure is distinct from a disruption to crude supply because it restricts exports of refined products. China, the world's largest crude importer, also curbed petroleum product exports in March, when the outbreak of the Iran war disrupted crude supply from the Middle East. Beijing eased those restrictions in July but has since managed gasoline, diesel and jet fuel export volumes on a monthly basis.
Higher international crude prices, driven by rising Middle East tensions and supply concerns, also supported the shares. Brent crude for December delivery settled 4.37% higher at $102.31 a barrel on the previous day, while West Texas Intermediate for November delivery rose 2.71% to $92.87. For refiners that process and sell crude purchased at relatively lower prices, rising oil prices can also deliver inventory-related gains that boost earnings.
Refining margins and inventory gains do not always move in the same direction, however. S-Oil posted second-quarter operating profit of 965 billion won, down 21.6% from the previous quarter. Despite strong refining margins, inventory-related gains fell to 113.7 billion won in the second quarter from 643.4 billion won in the first.
For the benefit of China's export halt to translate into earnings, gains in product prices must outpace the increase in crude procurement costs. Giovanni Staunovo, an analyst at UBS, said other supply factors could have conflicting effects on refining margins, citing the possibility of a U.S. ban on diesel exports, releases from Europe's strategic diesel stockpiles and attacks on Russian refineries, according to Reuters.
