South Korea's Refiners Ride High on Ongoing Middle East Tensions

South Korea's major refiners are poised to extend their windfall gains into the second half of the year, despite initial expectations that the first half would be the peak. The ongoing Middle East war between the US and Iran has caused a significant disruption in crude oil supply, leading to a surge in refining margins for South Korean refiners.

According to the US Energy Information Administration (EIA), global crude supply disruptions will persist at least through the end of next year, with an estimated 600,000 barrels per day still offline. The EIA had earlier projected that global crude production would recover to pre-war levels by the first quarter of next year, but renewed attacks in the Strait of Hormuz and stalled US-Iran negotiations have pushed this estimate back further.

As a result, global crude inventories have plummeted by 69 million barrels, falling below 7.9 billion barrels for the first time since April last year. Industry watchers expect the windfall for South Korean refiners to continue, with refining margins already surpassing second-quarter levels and reaching $50 per barrel.

Jeon Woo-je, a researcher at KB Securities, noted that even if the Strait of Hormuz blockade were lifted immediately, the supply crunch would not ease quickly given the long shipping lead times. Lee Chung-jae, a researcher at Korea Investment & Securities, added that production disruptions at Gulf oilfields will persist, making a prolonged period of high oil prices likely.

The four major South Korean refiners - SK Innovation, GS Caltex, S-Oil, and HD Hyundai Oilbank - posted a combined operating profit of 14.79 trillion won ($10.5 billion) in the first half of this year alone, marking a dramatic turnaround from a combined operating loss of 1.14 trillion won last year.