Korean Refiners Rally as Oil Tops $100; S-Oil, GS Surge More Than 40% This Month

Refiners rise while airlines fall as Middle East tensions drive oil higher

US-Iran military conflict intensifies

Brent climbs above $100 a barrel

S-Oil and GS surge more than 40% this month

Higher refining margins boost earnings outlook

Korean Air, Jin Air and peers remain weak

Rising jet fuel costs weigh on profitability

Brokerages see further upside risk for oil

As international oil prices surge on escalating military conflict between the US and Iran, the impact on Korean stocks has split sharply by sector. Refiners have rebounded on expectations that rising refining margins will lift profitability. Airlines, by contrast, have stayed under pressure as higher fuel costs raise concerns over earnings.

According to the Korea Exchange, S-Oil closed 0.93% higher at 151,200 won on July 24. That compared with a 5.72% plunge in the Kospi on the same day. The company’s shares have jumped 42.11% this month alone. Over the same period, GS rose 43.74% and SK Innovation gained 37.09%.

The gains reflect growing expectations for improved refining earnings as crude prices climb. Brent crude futures for September delivery on ICE Futures Europe rose above the psychologically important $100-a-barrel level on July 23. It was the first time Brent had topped $100 a barrel since May 22, when it reached $103.54.

The rally came as military tensions in the Middle East escalated, with the US and Iran exchanging attacks and reprisals over control of the Strait of Hormuz. Concerns over oil supplies from the region have also intensified after Iran-backed Houthi rebels in Yemen attacked two Saudi oil tankers in the Bab el-Mandeb Strait in the Red Sea.

That has improved refining margins, or the spread refiners earn by processing crude into products such as gasoline and diesel. BNK Investment & Securities said this month’s month-to-date average refining margin rose to $40 a barrel and reached as high as $48 a barrel on July 17. That was well above last month’s spot refining margin of $29 a barrel and the long-term average of $10 a barrel.

Prices for refined products, especially diesel and kerosene, are rising faster than crude, rapidly widening refining margins, BNK Investment & Securities analyst Kim Hyun-tae said. If there is no major disruption to feedstock supply, refiners’ earnings should remain above expectations in the third quarter, he added.

Airline stocks, meanwhile, have continued to struggle. Higher oil prices push up fuel costs, increasing pressure on expenses. Jet fuel accounts for about 30% of airlines’ total costs, making it a major factor in profitability. Korean Air, the sector bellwether, has fallen 7.62% this month. T’way Air dropped 22.64%, Jin Air lost 9.88%, Jeju Air slid 8.91% and Asiana Airlines fell 6.8%.

Brokerages say international oil prices could rise even further than they did in March, when fighting between the US and Iran first broke out, if disruptions in the Strait of Hormuz and the Bab el-Mandeb Strait persist. The supply-demand buffer that had helped stabilize oil prices has already weakened significantly, Kyobo Securities senior researcher Wi Jae-hyun said. If geopolitical risks do not ease, crude could rise as high as $160 a barrel in the third quarter, he added.

The global energy market is now more vulnerable than it was during the March blockade of the Strait of Hormuz, Wi said. At current price levels, oil-market volatility is more sensitive to upside shocks than to downside moves, he added.

Ko Jung-sam, Hankyung.com reporter jsk@hankyung.com