High Rates Boost S-Oil's Value Amid Refining Capacity Constraints

IBK Securities has reaffirmed its top pick in the refining sector as S-Oil, despite rate hikes generally being seen as a headwind for oil refiners. The research firm's Lee Dong-uk explained that high rates raise the hurdle for new capacity additions and increase the pressure to retire old facilities.

According to Lee, 'In the refining industry lately, we need to look at the supply-side impact of rate hikes as much as the demand side.' He added that a high-rate environment makes existing refineries more valuable due to their hard-to-replace status.

The researcher also pointed out that rising rates reinforce an environment where it is hard to hold ample inventories, increasing the likelihood that small supply-demand shocks translate into larger margin swings. This means that rather than focusing on peak refining margins, investors should look at the duration of elevated margins.