After posting record-low deficits stemming from free-falling crude prices that led to massive inventory valuation losses in 2014, South Korea’s top refiners swung back to recovery in the second quarter thanks to high cracking margins and stable oil prices.

SK Innovation, the nation’s biggest oil refiner, recorded 987.9 billion won ($845 million) in operating profits from April to June, marking its second-highest quarterly performance ever, after the 1.36 trillion won posted in the first quarter of 2011.

“The company posted improved profits in the second quarter, as low oil prices raised cracking margins, while stable oil prices reduced the risk of inventory-related losses,” SK Innovation chief financial officer Cha Jin-seok said in a briefing.

Exceeding market expectations, Korea’s No. 3 refiner S-Oil also saw its operating profits soar to 613 billion won ($524 million) in the second quarter, up 157.4 percent compared to the previous quarter.

“Stable crude prices and optimal cracking margins led to improved operating profits,” S-Oil said, also citing its high performance as having “kept its refining capacities on full gear and maximized the production of its high-value oil products.”

GS Caltex and Hyundai Oilbank, which have yet to submit their regulatory filings, are also forecast to post record-high operating profits on the back of their refining gains, according to market analysts.

Cracking margins, or crack spreads, refer to the profits that refiners can reap by processing one barrel of crude into commercial oil products. Marked by dollars per barrel, the margin excludes expenses, including wholesale crude prices and refining and shipping costs.

Though the exact figures differ across companies, a margin of between $3 and $4 is seen as the break-even point for Korean refiners. Last year, the refining sector was pushed into the red as global oil prices remained at an average of around $100 a barrel while margins hovered between $3 and $6.

This year in May and June, Korean refiners saw their cracking margins climb up to the $8 range, while global oil prices stayed between $40 and $60, helping the firms swing back to recovery in the second quarter.

Despite having recorded high profits, industry watchers expect Korean refiners to face a downswing in the third quarter, as improved margins have led global refiners to step up production, spurring an oversupply of oil products in the market. 

“An expected hike in U.S. interest rates later this year, combined with the increased supply of crude stemming from the Iran nuclear deal are driving down oil prices,” said SK Securities analyst Son Ji-woo, adding that poor margins are likely to hamper Korean refiners’ third quarter performance.

“SK Innovation’s third quarter performance is forecast to be halved compared to the second quarter, due to low oil prices and a decline in crack spreads,” according to Korea Investment & Securities analyst Lee Do-yeon.

“S-Oil’s third quarter performance is expected to drop by 56 percent, stopping short of 270 billion won,” said IBK Securities analyst Lee Ji-yeon, citing inventory-related losses and a drop in refining margins.

By Sohn Ji-young (jys@heraldcorp.com)