A report by Everbright Securities indicates that amid oil price volatility and ongoing global refining capacity cuts, the competitive edge of fully integrated industry leaders continues to strengthen, validating the global competitiveness of domestic large-scale refiners. Top-tier refining companies effectively hedge against oil price fluctuations through long-term crude supply contracts and diversified raw material procurement systems. Their integrated chain allows flexible adjustments between oil and chemical product output, leading to significantly better profit stability compared to smaller, independent refineries. Additionally, strict domestic controls on new capacity, with rigorous project approvals and lengthy implementation timelines, have created formidable and hard-to-replicate entry barriers for existing high-quality refining assets and supporting infrastructure held by industry leaders, thereby increasing their scarcity value. As the industry's supply-demand dynamics continue to improve and industry conditions steadily rise, refiners with full-chain advantages are poised to unlock significant earnings potential, with the window for value revaluation of premium assets now open.
Falling oil prices ease cost pressures, extending the recovery in the large-scale refining sector
The sustained decline in international oil prices has lowered the raw material cost base, opening up room for refining profit recovery. This week, the fundamentals of the domestic large-scale refining sector continued to improve. In terms of spreads, the naphtha cracking, refining, PX, and PTA margins were -$53/ton, RMB 951/ton, $275/ton, and RMB 532/ton, respectively, representing increases of +$104/ton, +RMB 110/ton, +$95/ton, and +RMB 149/ton compared to the previous week. Major product spreads have generally recovered. This trend is also reflected in the stock market, where all six major private refining companies posted gains for the week: Dongfang Shenghong (+7.05%), Hengyi Petrochemical (+5.61%), Tongkun Group (+4.70%), Hengli Petrochemical (+4.22%), Rongsheng Petrochemical (+4.20%), and Xinfengming Group (+1.14%). The positive correlation between spread recovery and stock price increases confirms the ongoing realization of the refining profit recovery logic.
Supply tightens due to domestic capacity controls and overseas refinery closures
Domestically, the implementation of 'anti-internal competition' policies continues, and the expansion of the refining sector is nearing its end. Under the strict government constraint of capping refining capacity at 1 billion tons, disorderly competition is expected to be effectively curbed, potentially improving the situation of low-price and cutthroat competition. Internationally, supply contraction is also significant. The permanent closure of aging refineries in Europe and the Americas, combined with geopolitical conflicts impacting Middle Eastern capacity, is accelerating the global refining capacity shakeout. IEA data shows that global refinery crude oil throughput is expected to drop sharply by 4.5 million barrels per day (bpd) to 78.7 million bpd in the second quarter of 2026, with an average annual decline of 1.6 million bpd to 82.3 million bpd, mainly due to infrastructure damage, export restrictions, and reduced raw material supply. The global refining supply side is on a clear tightening trajectory, providing favorable support for the cyclical upturn in the domestic large-scale refining industry.
Demand improves driven by domestic peak-season restocking and overseas supply-demand gap expansion
On the refined oil product side, current high summer travel demand is driving firm consumption of civilian gasoline and aviation jet fuel, providing a stable demand base for downstream refining. On the chemical side, with the traditional 'Golden September and Silver October' peak season for chemicals approaching, downstream polyester and chemical fiber companies are showing increased willingness to restock at lower prices, boosting sales volumes of polyester filament yarn. Overseas demand growth further expands the industry's growth potential. According to Platts, from 2020 to 2023, due to the impact of the pandemic and the global energy transition, regions in Southeast Asia and Australia saw over 30 million tons of refining capacity permanently shut down, significantly reducing regional supply capacity. The supply-demand gap for refined oil products in Southeast Asia is expected to widen further to 68 million tons by 2026, providing ample incremental demand for domestic refined oil and chemical product capacity. Supported by the seasonal recovery in domestic demand and the expanding overseas supply-demand gap, the demand-side support for the refining industry is strengthening, with clear signals of a cyclical recovery becoming more evident.
Integrated leaders' advantages stand out, revaluation of quality refining assets plausible
Against the backdrop of oil price volatility and persistent global refining capacity cuts, the competitive advantages of fully integrated industry leaders are continuously expanding, continually validating the global competitiveness of China's large-scale refiners. Top-tier refiners effectively hedge against oil price fluctuation risks through long-term crude oil contracts and diversified raw material procurement systems. Their full-chain layout allows for flexible adjustment between oil and chemical product output structures, resulting in significantly better earnings stability compared to smaller, independent refineries. Furthermore, with strict domestic controls on new capacity, rigorous project approval processes, and lengthy implementation timelines, the existing high-quality refining capacity and comprehensive industrial support facilities owned by leading companies have established highly duplicable core barriers, continuously enhancing their scarcity value. As the industry's supply-demand dynamics continue to improve and business conditions steadily rise, the earnings potential of refining leaders with full-chain advantages is poised to be fully released, and the window for revaluing high-quality assets is now open.
Risk reminder
Risks include fluctuations in product and raw material prices, weaker-than-expected downstream demand, and slower-than-expected capacity construction progress.