Oil Prices Soar, Oil Stocks Adjust: When to Chase the Rally?

Recently, the Houthis have occupied other straits in addition to the Strait of Hormuz and attacked Saudi oil facilities, leading to an escalation of geopolitical risks. WTI oil prices are fluctuating around $101-$102, and this surge is negatively impacting the market. The complex interplay of Middle Eastern dynamics and history has increased oil price volatility.

This threatens to block crude oil shipping routes via the Suez Canal to the Mediterranean and bypassing the Cape of Good Hope. With Saudi Arabia's East-West pipeline also destroyed, there is a possibility that both the upper and lower sections of the Red Sea will be blocked. The U.S. not responding to Saudi Arabia's request for help appears to be an attempt to avoid provoking the Houthis and risking stronger attacks on Saudi oil facilities.

From Yanbu Port, crude oil was then exported via the Bab-el-Mandeb Strait or the Mediterranean through the Suez Canal. However, the Houthis occupied the Bab-el-Mandeb Strait in the last 2-3 days, blocking the southern shipping route of the Red Sea. To make matters worse, the northern shipping route was destroyed on the mainland, causing Saudi Arabia difficulty in exporting crude oil. Dubai crude prices have surged by 23% compared to WTI, exceeding $120, a significant increase.

Crude oil reserves at Saudi Arabia's Yanbu Port are approximately 7 days' worth, and even combining tanks at other nearby ports, it amounts to around ten days. Currently, there are no issues with crude oil sourcing until October, but if the East-West pipeline remains shut down for more than ten days, it could last for 5-6 weeks. In this case, alternatives such as utilizing domestic strategic reserves would be necessary. While there is no significant short-term risk, as the year-end approaches, oil prices are likely to strengthen, and crude oil sourcing issues could arise.

In March and April of this year, Dubai crude was priced $50-$60 higher than WTI. This was due to a change in the Dubai crude benchmark calculation method. Crude oils from within Hormuz, such as Iraq, were excluded from the benchmark calculation due to delivery difficulties. Currently, the Dubai crude benchmark only includes Omani crude, UAE Fujairah crude, etc., located outside Hormuz. With both Hormuz and the Red Sea blocked, Dubai crude is now more than $20 more expensive than WTI, currently exceeding $120. This causes difficulties in passing on product prices and excessive oil prices can lead to demand destruction.

Due to the surge in oil prices, refining margins have also seen a significant adjustment recently. In particular, U.S. refining margins started to decline from August 31st, coinciding with the beginning of the oil price surge. In the past, there have been several instances where gasoline demand sharply decreased when oil prices rose to $100-$120. The current situation is even more severe, as product prices are higher than crude oil prices, potentially leading to stronger demand destruction. Asian countries, which primarily use Dubai crude, face increased cost burdens and compounding crude oil sourcing risks.

Crude oil freight rates from Oman have also risen significantly. These circumstances could negatively impact the performance and stock prices of refining companies in the short term. Analyst Yoon Jae-sung has maintained a positive outlook on oil stocks since last year, but he diagnoses that a short-term correction is due to the rapid surge in oil prices and the potential for associated risks. Major oil stocks such as SK Innovation and S-OIL, in particular, have recently undergone adjustments, facing burdens from margin compression, crude oil sourcing issues, and rising freight rates due to the surge in oil prices.

If oil prices rise further from current levels, risks could increase. If the war drags on and oil prices remain sluggish at $80-$90, it may not be the best, but it could be the second-best option. At this level, demand is not likely to be severely destroyed. However, a surge in oil prices could have a negative impact on the macroeconomy, leading to caution. The government's fuel tax cap is also deemed difficult to lift immediately due to high oil prices and unstable geopolitical factors.

Asian countries are seeking to diversify their import sources for raw materials (crude oil, LNG, etc.) that pass through the Strait of Hormuz. This implies a mid-to-long-term increase in demand for crude oil and gas that does not pass through Hormuz, meaning the Middle East will lose customers. OPEC is currently in a state of collapse, with the UAE's withdrawal and Venezuela's mention of potential withdrawal. If OPEC falters, oil-producing nations will try to increase production, and Venezuelan and U.S. crude will flow into Asia, expanding crude oil options for Asian countries.

Trump identifies high oil prices and OPEC's strong power as the fundamental causes of difficulties in controlling inflation and interest rates. Weakening OPEC's power to curb oil prices and secure energy hegemony is interpreted as Trump's grand strategy. Encouraging Venezuela's exit from OPEC is also part of this strategy.

Iraq could be a major trigger for OPEC's collapse. Iraq recently announced that it could increase its crude oil production by two to 2.5 times within six years, reaching 10 million barrels, which is more than Saudi Arabia. This would violate OPEC's production quota, and Iraq is threatening to withdraw from OPEC if its production quota is not increased. If Iraq, the second-largest producer after Saudi Arabia, withdraws, OPEC's collapse could become a reality. In the long term, the transition to an electrified era will reduce the value of crude oil, leading oil-producing nations to accelerate crude production and shift towards gas businesses. Saudi Arabia is also focusing on increasing gas production rather than crude oil.

In the future electrified era, gas power generation is expected to dominate among fossil fuels. Consequently, the perception that the value of crude oil may decline in 20-30 years is spreading among oil-producing countries. These countries are moving to produce and monetize their crude oil as quickly as possible, then transition to gas businesses. From this perspective, the collapse of OPEC can be seen as an expression of the will of oil-producing countries to monetize their crude oil and move into the gas market. Saudi Arabia is also focusing on plans to increase gas production rather than crude oil production, and all oil-producing countries share this view, making increased crude oil production competition inevitable.

With all oil-producing nations ramping up crude oil production, there's a possibility that OPEC's status will shift to the gas market. Former President Trump proposed an energy truce between Russia and Ukraine, driven by short-term concerns over high oil prices. Currently, US diesel prices are at historical record highs. Europe primarily imported diesel from Russia, but Russian refining facilities have been hit by Ukrainian drone attacks, disrupting diesel production. This raises the possibility of Russia banning gasoline and diesel exports, which is expected to cause a significant shock to the global energy market. The situation could become even more severe as diesel shortages within the US deepen.

With the possibility of Russia banning petroleum product exports, and potential domestic shortages, the U.S. market could face a significant shock. While former President Trump's exact intentions are unclear, it appears he believes securing oil and fossil fuel resources, like those in Venezuela and Iran, is crucial for the long-term energy hegemony struggle, even if it means enduring short-term risks. The U.S. is indirectly involved in the Ukraine war through drone support, influencing resource acquisition. With U.S. diesel prices surpassing a critical point for the midterm elections, the energy market's movements must be closely monitored over the next 2-3 months.

With gas supply from Qatar not being smooth, Europe's gas inventory currently stands at only 60%. Typically, by October, it should be 70-80%, but some countries have declared they will not even fill their gas reserves this winter. As this winter is expected to be unusually cold, Europe's energy crisis could worsen. Meanwhile, the U.S. Solar Section 232 measure is a national security-related policy that protects polysilicon, wafers, cells, and modules for solar panels. This policy is interpreted as a strategy to protect the domestic industry from Chinese products, while also safeguarding the semiconductor upstream, considering that companies producing polysilicon for solar also produce polysilicon for semiconductors.

There are only two companies in the United States, Hem and Wacker, that produce both solar-grade and semiconductor-grade polysilicon. These companies primarily focus on solar, with semiconductor-grade polysilicon accounting for approximately 20% of their production. Concerns arise that if these companies face difficulties due to the influx of Chinese polysilicon, not only the solar industry but also the entire semiconductor upstream could be shaken. Therefore, the Solar Section 232 policy is understood as a policy on the extension of reshoring, aimed at protecting the solar industry and rebuilding the semiconductor value chain. As a result, companies like OCI Holdings and Hanwha Solutions, which produce solar-grade polysilicon and wafers, are expected to benefit in the future.

OCI Holdings and Hanwha Solutions are expected to benefit as they play a crucial role in building the solar supply chain within the US and supply non-Chinese products. While both companies' stock prices rose significantly in August, they shifted to a decline in September. This is because the Section 232 policy will be implemented on December 4th, but a ban on hoarding was also enacted beforehand. Therefore, the market's earnings estimates, which anticipated an immediate price increase due to the inability to hoard, became likely to miss, and concerns about short-term earnings weakness led to a stock price correction. However, since a minimum profitable price has been set through Section 232, a price increase is seen as inevitable in the long term.

Oil price movements are an area of response that is difficult to predict. In situations where oil prices surge, interest rates also rise, which can negatively impact solar projects. This is because solar projects require financing, and high interest rates increase cost burdens. Therefore, the view that oil price surges will serve as a hedging tool for the energy sector is not applicable at current oil price levels. Rather, it is advisable to approach cautiously as oil prices rise. In the short term, instead of buying enthusiastically, a stock price correction could present a good buying opportunity.