Seoul - The recent surge in global liquefied natural gas (LNG) prices is expected to drive up demand for oil, a key substitute, creating potentially lucrative opportunities for domestic oil refiners.
Several factors are converging to create a favorable environment for the refining sector this year. These include anticipated higher international oil prices due to ongoing production cuts and limitations on refining capacity expansion, coupled with improving refining margins and a surge in oil demand from rapidly developing economies like India.
According to industry sources, natural gas futures for March delivery on the Dutch TTF Exchange climbed to 58.76 euros per megawatt-hour earlier this week, marking a 5.4% jump from the previous trading day and more than doubling the price from mid-February last year.
The relentless rise in gas prices stems from persistent supply concerns stemming from the ongoing conflict in Ukraine, coupled with a prolonged cold snap across Europe that has intensified heating demand.
European gas inventories have dwindled to a mere 49% of total storage capacity, significantly below the 67% level seen at the same time last year, raising concerns about potential shortages as winter progresses.
The US-China trade tensions have further exacerbated the situation. Following US President Donald Trump's announcement of tariffs on steel and aluminum imports, China retaliated with levies on US LNG, further disrupting global gas markets.
As LNG prices continue their upward trajectory, demand for oil as a substitute is expected to rise, leading to improved refining margins for oil refiners.
The industry witnessed a similar trend in 2022 when the Ukraine war sent spot LNG prices soaring, prompting many global companies to switch to low-sulfur fuel oil (LSFO) for power generation. This resulted in a significant boost in diesel margins, which climbed from an average of $10-15 per barrel in 2021 to around $50 per barrel in 2022.
"We anticipate that the continued rise in domestic LNG prices will have a positive impact on the performance of domestic oil refiners," said an industry insider.
The domestic refining sector, which struggled with declining refining margins last year, is optimistic about a turnaround in fortunes this year, driven by the LNG price surge, rising oil prices, and robust demand.
While the recent increase in crude oil prices has yet to be fully reflected in product prices, analysts expect this lag to be resolved in due course.
Furthermore, US sanctions against Russia, which have limited Russian oil supplies to countries like China and India, are expected to provide a competitive edge to domestic refiners.
"While uncertainties remain due to various measures by the US government, the fact that domestic companies have gained price competitiveness compared to their rivals due to the sanctions against Russia is a positive development," commented Kim Hyung-geon, an economics professor at Kangwon National University.
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