Why are Sinopec’s refining margins resilient? Citi points to crude procurement discounts and easing fuel-price adjustment pressure
The discount on China’s imported crude relative to South Korea’s has widened, while the increase in costs not passed through to domestic gasoline and diesel prices has narrowed from its earlier level. Citi therefore expects Sinopec’s core refining gross margin to remain at 6–8 dollars per barrel in the second half of 2026, although higher freight costs and weak demand remain constraints.
Original source：Citi ResearchFirst published on Unhidea：Original source date：
Key takeaway
Citi believes advantages in crude procurement, easing pressure from domestic price adjustments and a recovery in exports can together support Sinopec’s refining profits. A key condition is whether the procurement discount can persist and offset part of the freight impact.
Why might refining profits improve when crude prices rise?
Citi expects Sinopec’s core refining gross margin to remain at 6–8 dollars per barrel in the second half of 2026, with resilience continuing into the fourth quarter. Support comes from an improving relationship between feedstock costs and product selling prices, while domestic demand remains weak.
In the third quarter of 2026, China’s average imported crude price, excluding Russian supplies, was about 8 dollars per barrel lower than South Korea’s, compared with a historical discount of about 2–3 dollars per barrel. Citi regards the wider gap as evidence of stronger procurement capabilities and uses this cost advantage as an important basis for its assessment of Sinopec’s refining business.
Domestic gasoline and diesel price increases did not fully keep pace with higher crude costs, but the portion absorbed by refiners has fallen: the two price adjustments on 25 September and 15 October totaled about 600 yuan per tonne, equivalent to about 9 dollars per barrel, below the earlier peak of 1,400 yuan per tonne, or about 22 dollars per barrel.
How much could margins improve, and what factors might offset the improvement?
Assuming China’s imported crude costs remain about 8 dollars per barrel below South Korea’s in October, Citi estimates that the crack spread for regulated gasoline and diesel, calculated using spot prices over the same period, would be about 15 dollars per barrel, above the 7–8 dollars per barrel trough in 5–July. This is an estimate of the spreads for two product categories and differs from the company-wide core refining gross margin measure.
Soaring freight rates are a direct constraint. In 8–September, Chinese refiners’ throughput was below the sum of crude imports and domestic production. Citi therefore believes that subsequent inventory draws and use of commercial reserves could partly cushion the rise in spot tanker rates; the actual impact depends on landed costs over the next 1–2 months and how refined-product price adjustments reflect those costs.
The recovery in refined-product exports in the third quarter helps mitigate the negative impact of the lag in passing through crude costs. The report also notes that export margins were favorable and exports accounted for about 7%–8% of refinery throughput. Although jet fuel is priced by the market, China’s jet fuel crack spread narrowed relative to the Singapore benchmark in the third quarter.
Why might the gap with Asian peers still narrow despite a higher share of regulated pricing?
About 45% of Sinopec’s refining volume corresponds to products subject to government price controls, above the roughly 12%–37% share for the Asian peers listed in the report. However, price freezes in Taiwan and South Korea and reductions in refinery ex-factory prices in Thailand also compress local refiners’ margins, so price-control pressure is not confined to Sinopec.
Under a scenario in which Dubai crude remains at about 110 dollars per barrel, Citi expects Asian refiners’ overall refining gross margins in the fourth quarter could face a drag of 5–7 dollars per barrel. This scenario differs from Citi’s commodities team’s forecast of 85 dollars per barrel for Brent crude in the fourth quarter. Differences in refiners’ mix of spot and long-term chartering, transshipment costs and procurement regions will also lead to differences in actual margins.
Despite weak demand, Citi remains positive on state-owned refiners’ prospects for gaining market share: if independent refiners’ access to Iranian crude shrinks or disappears, their competitiveness could decline. The driver here is a change in the competitive landscape, rather than a broad recovery in end demand.
What else supports Citi’s buy recommendation?
Citi rates Sinopec’s H shares a buy, with a target price of 5.20 Hong Kong dollars, implying 16.6% upside from the 23 October share price of 4.46 Hong Kong dollars. It points to capital expenditure discipline, positive free cash flow and a dividend yield of about 6%–7% as support for the share price.
The valuation still reflects demand constraints: the marketing business is valued at 8 times enterprise value/EBITDA, a discount of about 20% to peers in Thailand and Australia, partly because of a smaller contribution from non-fuel businesses and a peak in China’s transport fuel demand. Faster electric vehicle adoption leading to a decline in gasoline and diesel demand, or a weaker-than-expected recovery in chemical demand, would also weaken support for the company’s earnings and valuation.
