South Korean refiners, led by SK Innovation Co., may report earnings declines for the fourth quarter of the year, due to a sharp falloff in oil prices and a narrowing refining margin, industry sources said Thursday.

SK Innovation, the No. 1 player, is forecast to rack up an operating loss of over 200 billion won ($178 million) from its refining business in the October-December period, with GS-Caltex Corp. and S-Oil Corp. widely expected to log operating losses of over 150 billion won as well, according to estimates by a slew of brokerages. 

But their figures may sharply rise with their combined loss from the refining business reaching up to 900 billion won, the industry sources said.

A sharp fall in oil prices and low refining margins are behind their weaker-than-expected earnings. Local refiners are also suffering a rise in valuation losses of their inventories.

Since early October, the price of Dubai crude, South Korea's benchmark, has dropped by more than 30 percent, hovering around $55 per barrel.

The industry sources say that local refiners may have to brace for massive valuation losses from their inventories.

In the fourth quarter of 2014, local refiners had to embrace up to 1.5 trillion won in losses as oil prices plunged by some 35 percent.

A drop in oil prices leads to a rise in valuation losses of their inventories and hurts oil firms' refining margin.

The margin is the difference between the total value of petroleum products coming out of an oil refinery and the cost of crude and related services, including transportation.

Usually, a South Korean refiner can generate profit if the refining margin exceeds $5 per barrel.

But the benchmark Singapore complex gross refining margin is around $3 per barrel this month due to oversupply and a fall in oil prices, compared with $4.6 in November and $5.2 in October.

In December of last year, the margin stood at over $7.

Singapore is the regional trading hub of the benchmark Dubai crude.

"Oil price declines are hurting refiners' bottom lines," said Son Ji-woo, an analyst at SK Securities. "Their earnings for next year may be not good as well."

Adding to their woes are a fall in prices of key chemical goods as refiners are reliant on chemicals to generate profit and fuel growth, instead of just being dependent on petroleum refining.

For instance, the price of ethylene, the building block for a vast range of chemicals from plastics to antifreeze solutions and solvents, was around $800 per ton early this month, a sharp drop from the around $1,300 per ton seen before August this year, due to oversupply and a slump in demand. (Yonhap)