Author: Pang Xiaohua Source: China Chemical Industry News November 4, 2019

Affected by the double factors of soaring freight rates of oil tankers and crude oil premiums——

Affected by the soaring freight rates of oil tankers, stock analysts recently lowered their performance expectations for Asian oil refining companies. The cost increase squeezes the refining profits. Affected by this, the stock prices of top Asian oil refining companies such as Sinopec, Japan’s JXTG Holdings and South Korea’s SK Innovation may be under pressure in the coming months.

On September 25, the United States imposed sanctions on Chinese tanker companies, which caused merchants who had already booked Chinese tankers to seek other tankers, resulting in a surge in spot demand in the tanker market, which led to a sharp increase in freight rates on major global routes. This has virtually increased the cost of transportation for refiners, and the spot freight rates for crude oil from the Middle East to Asia have soared to record highs.

At the same time, Saudi Arabia’s oil facilities were attacked, resulting in a 5% reduction in global oil supply and stimulating oil prices to soar in a short period of time. Opening on September 16th, the price of US West Texas Light Crude Oil (WTI) futures rose to US$63.34 per barrel, an increase of up to 25.91%. Brent crude oil futures prices also surged 19.5% after the attack, the largest intraday increase.

Soaring freight rates and rising crude oil costs may offset rising refining profits expected in the fourth quarter. Affected by the International Maritime Organization (IMO)'s mandatory implementation of new regulations for low-sulfur ship fuels from 2020, ship fuels will begin to shift to clean fuels. The demand for diesel and ultra-low sulfur fuel oil (VLSFO) will strengthen in the fourth quarter, thereby stimulating the growth of refining profits.

Citibank's oil refining industry equity analysts said that Sinopec, the largest oil refining company in Asia, is the most vulnerable to rising freight costs, because 70% to 80% of its shipping costs are based on spot freight. If a quarter's refining profits fall by $3/barrel, then the company's performance in 2020 will fall by 5%. The freight of the super tanker that transported 2 million barrels of crude oil from the Middle East to China has dropped from the highest of US$9/barrel to the current US$5/barrel, but it is still about US$1.7/barrel higher than the freight rate before the US sanctioned Chinese tanker .

Citi analyst Toby Shek said: \"The substantial increase in tanker freight rates will have a negative impact on Sinopec's refining profits. This effect may begin to appear in December this year because there is a lag period from the purchase of crude oil to the sale of crude oil processed products. \"

Analysts also said that refiners such as South Korea's S-Oil, SK Energy's SK Energy and Thai Petroleum Company were not affected by the surge in tanker freight rates. 70% to 75% of the crude oil of these refiners is transported by tankers with long-term agreements, so freight rates are relatively stable, and about 50% of crude oil of Formosa Petrochemical is also transported by tankers with long-term agreements.

According to Refinitiv data, the share prices of Sinopec, JXTG Holdings, and SK Innovations, the largest refiners in China, Japan, and South Korea, all fell by 23% to 35% compared with a year ago.

Reiji Ogino, a senior analyst at Mitsubishi UFJ Morgan Stanley, said in the report that Japanese refiners may lower their profit forecasts for the current fiscal year when they announce the July-September results report because crude oil prices are below Their expectations.

Affected by the slowdown in global economic growth, Brent crude oil futures prices fell 8.7% in the third quarter. Rho Woo-ho, an analyst at Meritz Securities, said South Korean refiners are expected to record loss of oil inventories and weak profits in the petrochemical industry in the third-quarter results report.