S-Oil, headquartered in Seoul and wholly owned by Saudi Aramco, is unlikely to be affected by concerns about lower fuel prices and stricter environmental rules, according to analysts.

The new International Maritime Organization rules -- IMO 2020 -- lowering the limit of sulfuric content in bunker fuel to 0.5 percent from 3.5 percent will come into force in January.

Refiners have been very worried, with the benchmark Singapore complex gross refining margin -- reflecting Asian refiners’ average production yield -- hitting a historic low as the proportion of high-sulfur fuel was factored in.

High-sulfur fuel has seen its price plunge in the anticipation of IMO 2020 rules.

However, S-Oil is expected to see a sharp rise in its profitability and stock price due to its preemptive trimming of the production of high-sulfur fuel and ramping up output of light fuel whose demand is forecast to grow, according to analysts.

“With high-sulfur fuel margins slowing down significantly, companies that produce it are bound to endure losses,” said Mirae Asset analyst Park Yeon-joo in a report.

“As they are expected to adjust their operating rates, which will lead to tight diesel and gasoline supply, S-Oil with a high upgrading ratio is expected to reap benefits.”

The price gap between high-sulfur heavy fuel and crude has been widening, from $0.7 per barrel on average in September to minus $12.8 in October to minus $23.2 in November. This means, more sales of high-sulfur fuel results in a bigger loss

S-Oil, meanwhile, has completed additional upgrading facilities last year, to transform most high-sulfur fuel produced in the refining process into high value-added products such as gasoline, the industry watchers noted.

The refiner slashed the proportion of high-sulfur heavy fuel such as Bunker C oil from 12 percent to 4 percent by starting the operation of its new Residue Upgrading Complex in November last year. Other sources of revenue are also anticipated through new facilities, such as the revamped residue hydro-desulfurization, which turns a high-sulfur fuel surplus into high value-added, low-sulfur marine fuel.

Growing diesel supply compared to demand has also pulled down Singapore GRM, as Chinese and Indian refiners have increased their export volumes amid a sluggish economy.

The demand however is expected to pick up in the winter with increasing bunker fuel demand in line with the implementation of IMO 2020, the market watchers said.

By Shin Ji-hye (shinjh@heraldcorp.com)