CITIC SEC: High oil prices support upstream profitability; maintain "Outperform" rating on the oil and petrochemical industry.

CITIC SEC released a research report stating that against the backdrop of high oil prices and recurring geopolitical tensions, the bank recommends positioning around upstream resource endowments, cost control capabilities, and shareholder returns, balancing earnings elasticity with operational stability. Focus should be placed on targets with solid oil and gas resource foundations and well-developed business layouts, targets with prominent refining-chemical integration advantages, targets with a high proportion of upstream business and potential for reserve growth and production increases, and targets with strong overseas refinery performance. Taking into comprehensive consideration the support of high oil prices for upstream profitability, opportunities for improvement in refining-chemical spreads, and shareholder returns of leading enterprises, the "Outperform" rating on the oil and petrochemical industry is maintained. CITIC SEC's main views are as follows: U.S.-Iran negotiations have made no substantive progress, and shipping through the Strait of Hormuz remains obstructed Disagreements between the U.S. and Iran over issues such as lifting the blockade and restoring navigation have not yet been eliminated, and there remains significant uncertainty over the full restoration of normal shipping through the strait. According to Iran's state television on October 6 local time, an Iranian Ministry of Defense spokesperson stated that Iran's domestic production capacity for specific weapons, equipment, and ammunition has increased to 2.5 times the level before the U.S.-Israel-Iran conflict. According to Reuters, in the first week of October, tanker attacks in the Strait of Hormuz reached their highest level since the outbreak of the U.S.-Israel war against Iran in late February, and frequent attacks have further intensified shipping security risks. According to Baltic Exchange data, as of October 7, the freight rate for a single Very Large Crude Carrier transporting U.S. crude oil to Asia had risen to $77 million, and cost pressure in crude oil trade continues. The Yemen situation is escalating, and risks to energy facilities and the Bab-el-Mandeb Strait are rising According to Xinhua News Agency, Yahya Saree, military spokesman for Yemen's Houthi armed forces, said on social media on October 7 that over the past 24 hours, Saudi Arabia launched 156 airstrikes and missile attacks on six Yemeni provinces; Turki al-Maliki, spokesman for the Saudi-led multinational coalition, also said in a statement on social media on the evening of October 7 that the coalition launched a large-scale military operation against Yemen's Houthi armed forces, destroying 82 military targets. Military actions by both sides are showing an escalating trend. Considering that Saudi Arabia is an important global crude oil producer and exporter, further escalation of the conflict could affect oil fields, processing facilities, and export ports, while also affecting navigation through the Bab-el-Mandeb Strait and increasing crude oil supply risks. Crude oil prices are expected to remain high and volatile According to Wind data, on October 7, Brent and WTI crude oil futures closed at $100.20 and $88.28 per barrel, respectively. The recurring U.S.-Iran situation, the conflict between Saudi Arabia and the Houthis, and risks in the Strait of Hormuz and the Bab-el-Mandeb Strait continue to provide support for oil prices. We expect crude oil prices to remain high and volatile at around $100 per barrel for the remainder of 2026, with the pace of fluctuations mainly depending on negotiation progress and the degree of recovery in strait shipping, while also requiring attention to the possibility of a rapid decline in geopolitical risk premiums. Refined product spreads remain high and volatile According to Wind data, on October 8, Singapore diesel cracking spreads reached as high as $73 per barrel, and gasoline cracking spreads rose to $40 per barrel; in September-October, U.S. diesel cracking spreads continued above $100 per barrel, and gasoline cracking spreads rose to around $45 per barrel. The tight supply-demand pattern continues, and refined product spreads may continue to strengthen in the short term. At this stage, the U.S.-Iran conflict and the Russia-Ukraine conflict continue, the supply-demand imbalance in refined products is difficult to effectively alleviate in the short term, global inventories continue to decline, and the support for spreads from tight supply is expected to continue. As of September 30, 2026, according to the EIA, U.S. distillate inventories stood at 105 million barrels, down 13% year over year compared with the past five years; according to Platts, although Singapore middle distillate inventories rebounded to 8.84 million barrels, they were still about 9.8% lower than approximately 9.8 million barrels in the same period last year. Against the backdrop of inventories not yet fully recovered and continued supply disruptions at overseas refineries, we judge that refined product spreads still have strong support, and refining profitability is expected to improve further. Diesel may be the most elastic product in this round of refined product spread increases According to Wind data, in the week of September 25, 2026, Singapore diesel, jet fuel, and gasoline cracking spreads were $55.5, $47.8, and $19.1 per barrel, respectively, expanding by $39.0, $30.7, and $14.5 per barrel compared with the 2026 January-February average, with diesel showing the most significant per-barrel spread expansion. Diesel demand covers areas such as industrial production, freight logistics, and agriculture, and rigid demand provides support for prices. In a tight supply-demand environment, marginal supply changes are more likely to amplify spread fluctuations, and the upside elasticity of diesel spreads is expected to lead other refined product varieties. Risk factors Downside macroeconomic growth; declining demand for crude oil and refined products; unexpected changes in the Middle East geopolitical situation; higher-than-expected production increases by oil-producing countries and release of strategic reserves.