[Weekend Money] "Is It Risky to Chase Oil Refining and Petrochemical Stocks?"

Expectations for Industry Improvement if Hormuz Situation Normalizes
Short-Term Earnings Volatility Unavoidable... "It’s Still Time to Wait"

There is renewed attention on the oil refining and petrochemical sectors, which have recently experienced a short-term surge. This is because expectations are rising that the industry could enter a full-fledged improvement phase if the tensions surrounding the Strait of Hormuz are completely resolved. However, as this remains a period of significant short-term volatility, experts advise that it is important to take a cautious approach before deciding whether now is the right time to jump in.

In a recent report, Hana Securities pointed out that the current Hormuz crisis is prompting changes in the way Asian countries procure crude oil. From April 1 to April 20, the proportion of crude oil imports to Korea from the United States, Australia, and West Africa increased noticeably compared to previous levels. It is also reported that Alaskan crude oil has been brought into Korea and is undergoing trial procedures.

This is ultimately interpreted as a move to reduce dependence on Middle Eastern crude oil. The report suggests that if this trend continues, the price-setting power of OPEC+ (the Organization of the Petroleum Exporting Countries and its non-member oil-producing partners) could weaken, enabling Asian refiners to secure a more favorable position in negotiations with Middle Eastern oil producers. The recent withdrawal of the United Arab Emirates (UAE) from OPEC+ is also seen as a sign of such potential changes. Additionally, concerns that the U.S. shale industry may no longer be able to increase production as in the past are cited as another variable.

Conversely, there is an interpretation that the relative circumstances for Asian refiners and petrochemical companies, especially Korean firms, could gradually improve.

This is why domestic refining and petrochemical companies are attracting attention. They are equipped with world-class facilities and have a high export ratio, which means they are well positioned to fill any supply gap that may arise from a disruption in Middle Eastern product supply. Given that it is difficult to predict when infrastructure and facilities in the Middle East will be restarted, and that future expansion schedules may be delayed, the significance of Korean companies could grow even further.

However, it is difficult to assume that these expectations will immediately translate into a sustained upward trend in stock prices. The report particularly advises caution due to short-term uncertainties. Whether investors should immediately chase the recently surging oil refining and petrochemical stocks, or wait for a better entry point, will depend on how the situation develops going forward.

If negotiations between the United States and Iran drag on and oil prices rise, macroeconomic pressures could mount and concerns about weakening demand could lead to a sharp drop in oil prices. On the other hand, if negotiations are concluded smoothly, the rush to secure inventories could subside, causing both oil prices and product prices to fall.

In both scenarios, companies could face short-term earnings pressure due to the reverse lagging effect (the phenomenon where profits decrease when inventory purchased at high raw material prices is converted into products and sold after prices have fallen) and negative inventory effects caused by declining selling prices. This means that, regardless of the broader industry direction, there is potential for volatility in financial figures for the time being.

For this reason, Hana Securities interprets the current period not as the beginning of a major uptrend, but rather as a phase of continued volatility. Yoon Jaesung, a researcher at Hana Securities, explained, "In materials sectors, a major uptrend in stock prices typically occurs when demand is stable and both selling prices and costs rise together, resulting in a lagging effect and sustained profit growth. While the oil refining and petrochemical sectors could enter such a phase after the complete normalization of the Hormuz situation, we are now still in a period of volatility, not a major uptrend."

This content was produced with the assistance of AI translation services.