Why could the cost of imported crude depress refining margins?

  • Sinopec expects the premium on imported crude in the fourth quarter of 2026 to reach 15–25 dollars per barrel, including official selling price premiums, freight and insurance costs; the actual figures were 14.7 dollars and 4.2 dollars per barrel in the second and third quarters, respectively.
  • Citi believes gross refining margins could come under pressure in the fourth quarter, with the impact depending on whether refiners use spot or term charters. Sinopec's earnings call indicated that the company mainly uses spot-chartered very large crude carriers and plans to strengthen cooperation with Chinese shipping companies.
  • Citi expects Sinopec's fourth-quarter gross refining margin to weaken quarter on quarter, but draws on China's commercial crude reserves, increased diesel and jet fuel exports, and potential inventory gains could provide some cushion.

How much can additional exports alleviate the diesel shortage?

  • Sinopec expects exports to remain stable in the fourth quarter; its refined product exports in the first nine months of 2026 were 12.7 million tonnes, roughly unchanged year on year. Citi, meanwhile, believes China's fourth batch of export quotas could drive a quarter-on-quarter increase in fourth-quarter exports.
  • The additional quota of approximately 5.7 million tonnes brings the full-year quota to 42 million tonnes, up 5%–6% year on year. Assuming a quota utilization rate of approximately 90%, Citi estimates that China's refined product exports in the fourth quarter could reach as much as 5 million–5.5 million tonnes per month, about 200 thousand barrels per day above the level from month 8 through September. The increase could consist mainly of diesel and jet fuel.
  • South Korea plans to ease diesel export restrictions from November 2026, with exports expected to increase by approximately 50 thousand barrels per day; the European Union plans to release 20.5 million barrels of diesel stocks by the end of January 2027, equivalent to approximately 220 thousand barrels per day over the next three months. Citi estimates that, together with the potential increase in Chinese exports, the three sources could fill about one-third of the combined diesel supply shortfall of 1.2 million–1.3 million barrels per day from the Middle East and Russia.
  • Additional supplies could weigh on near-term diesel and jet fuel crack spreads relative to crude, but Citi expects potentially extensive refinery maintenance next spring and a slow recovery in Russian refinery runs, meaning tightness in refined products could take longer to ease.

Which refiners are more exposed to rising freight costs?

  • Citi believes FPCC is least affected by the recent surge in freight rates, followed by S-Oil, SKI and TOP; SPRC and PTTGC use spot charters exclusively and appear to be the most affected.
  • Citi maintains S-Oil and FPCC as its top picks in regional refining. The bank believes S-Oil's free cash flow and balance sheet could improve significantly in the first half of 2027, creating room for higher dividends; its valuation also takes into account the contribution of the Shaheen project, while a delay in the project's startup is among the downside risks.