Orient: It is expected that global refining will remain tight, and domestic refining is likely to usher in a long-term prosperous period.

Orient has released a research report stating that the current high profitability of refined oil products, particularly diesel, is primarily driven by the impact of conflicts in the Middle East and between Russia and Ukraine on supply. The main incremental supply sources, namely China and the Middle East, are expected to see a decline in growth rates in the future due to policy adjustments and geopolitical influences. Therefore, the bank anticipates that global refining capacity will remain tight. Domestic refining enterprises are expected to enter a prolonged boom cycle due to the high profitability of overseas refined oil products. Orient's main points are as follows: Global refining capacity will remain tight The current high profitability of refined oil products, especially diesel, is mainly attributed to the impact of the Middle East and Russia-Ukraine conflicts on supply. In terms of sustainability, the blockade of the Strait of Hormuz may be relatively short-term, while the destruction of refineries in Russia and the Middle East is expected to have a longer-term effect. For instance, the processing capacity of Russian crude oil was maintained at around 5.6 million barrels per day shortly after the outbreak of the Russo-Ukrainian conflict. However, with the continuation of the war and Ukraine's selective strikes, statistics show that Russia's crude oil processing capacity had dropped to about 3.6 million barrels per day by July, with potential for further damage. Setting aside the unpredictable factors of war, the actual growth rate of global refining capacity has significantly slowed over the past few years. From 2018 to 2025, refining capacity growth in regions outside of China has nearly stagnated, reflecting the industry's expectations of a continuously shrinking product life cycle. As a result, the bank believes that the industry is also unlikely to increase capital expenditure on refining due to the profitability of refined oil products. Additionally, the previously major sources of incremental supply from China and the Middle East are expected to see a decline in growth rates due to policy adjustments and geopolitical influences. Therefore, the bank foresees continued tightness in global refining capacity. Domestic refining is expected to enter a long boom cycle Diesel is a very straightforward product of refining, with the overseas diesel-crude oil price spread maintaining a long-term level of $10-$20 per barrel. Following the outbreak of the Middle East conflict, the diesel price spread has reached $60 per barrel. Such outstanding profitability is likely to prompt overseas refineries to increase diesel production by reducing the yield of lighter components (gasoline, naphtha) in the short term. Meanwhile, the expansion of export components from domestic oil blending will also exacerbate the subsequent supply of lighter components for chemical production, thereby enhancing the profitability of domestic refining. In the medium to long term, the excessive profits from primary products like diesel are bound to shake the willingness of most enterprises to develop deep-processing products, leading to a suppression of global "oil conversion" investments and accelerating the recovery of the chemical industry. Finally, after the end of the Middle Eastern conflict, it is highly likely that we will see a situation where the growth of crude oil supply is significantly higher than that of refining capacity, and low oil prices will drive the refining sector towards a longer boom cycle. Investment recommendations and targets The bank believes that domestic refining enterprises are expected to enter a long boom cycle under the influence of high profitability in overseas refined oil products, primarily favoring Rongsheng Petro Chemical and China Petroleum & Chemical Corporation. The former is the 51% controlling shareholder of Zhejiang Petrochemical, which has a refining capacity of 40 million tons, while the latter is the largest state-owned refining enterprise in China. Additionally, both have long been granted national refined oil export quotas and can benefit to a certain extent from the high profitability abroad. Other representative large refining enterprises in China include Hengli Petrochemical and Jiangsu Eastern Shenghong. Furthermore, domestic enterprises that already own refining projects overseas will benefit even more directly, with companies like Hengyi Petrochemical, which has an 8 million ton refining project in Brunei. Risk warnings Changes in the macroeconomic situation; errors in capacity statistics; changes in assumptions affecting calculation results.