S-Oil's Q1 Operating Profit Soars to 1.23 Trillion Won on Inventory Gains

S-Oil has announced a significant turnaround in its first-quarter financial performance, achieving an operating profit of 1.23 trillion won, a stark contrast to the losses incurred in the same period last year. This remarkable recovery is largely attributed to the "lagging effect" – a phenomenon where the company benefits from holding cheaper crude oil inventory purchased before a price surge. The recent geopolitical tensions in the Middle East, particularly the conflict between the US and Iran, have driven up global oil prices, creating a favorable environment for S-Oil to profit from its existing crude reserves.

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Facilities regular maintenance and the implementation of the oil price cap system partially offset refining margins, but the lagging effect improved profits in the refining sector compared to the previous quarter.

The company's report highlights that over half of its operating profit stems from this inventory valuation gain. While regular facility maintenance and the government's "oil price cap" system somewhat offset profit margins, the lagging effect significantly boosted earnings compared to the previous quarter. S-Oil's monthly profit figures clearly illustrate this trend, with March alone seeing a surge to 812.2 billion won, following 176.6 billion won in January and 242.4 billion won in February.

Looking ahead to the second quarter, S-Oil anticipates that the positive impact of rising oil prices will continue to outweigh any potential slowdown in demand. However, the company also acknowledges a downside risk: if oil prices were to fall, S-Oil could face inventory losses and negative lagging effects, forcing it to sell products made from expensive crude at lower market prices. This scenario, particularly if a peace agreement is reached between the US and Iran, could reverse the current favorable market conditions.

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The blockade of the Strait of Hormuz led to a reduction in oil product supply due to disruptions in crude oil supply, significantly widening the spread between kerosene/diesel and crude oil prices, leading to a rise in refining margins.

This strong performance is not unique to S-Oil; other major South Korean refiners like SK Innovation, GS Caltex, and HD Hyundai Oilbank are also expected to report substantial first-quarter profits. Despite these impressive figures, the industry is adopting a cautious stance, downplaying the results as a temporary "lagging effect." This reticence stems from past experiences, such as the volatile earnings swings during the 2022 Russia-Ukraine war. Furthermore, the timing of these multi-trillion won profit announcements coincides with the government's ongoing efforts to compensate refiners for losses incurred under the "oil price cap" system. The government's proposed "production cost basis" for compensation clashes with the industry's argument that calculating individual product costs is impossible due to the continuous nature of refining processes. Nevertheless, achieving such high profits makes it difficult for companies to justify seeking compensation for losses under the price cap system.

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If oil prices fall in the future, there is a downside risk to operating profit due to inventory-related losses and the lagging effect.