CICC: Oil risk premium may have revaluation opportunities, refining domestic and international cold-hot differentiation may accelerate

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that recently, the US and Europe have imposed new sanctions on the Russian oil industry. If the restrictive measures are implemented, the discount of ESPO/URALS oil types against Brent may widen, while Middle Eastern crude oil may regain a premium due to substitution demand. In the overseas market, the EU will prohibit the import of refined oil directly or indirectly sourced from Russian oil. Considering the high operating rates of US refineries and the exit of European refining capacity, there may still be a gap of 8 million tons/year after overseas refineries increase their load, and East Asian refineries are expected to benefit from potential export space. In the domestic market, from the perspective of global market profits, the export arbitrage space of major refineries and private large-scale refining may help compensate for domestic market share competition, and profits are expected to gradually recover driven by exports.

CICC's main viewpoints are as follows:

Oil risk premium may have re-evaluation opportunities, Russian oil discount widens

According to media estimates, the extreme risk exposure of Russian oil supply after the tightening of restrictions may be about 1.5-2 million barrels/day. The 7% increase in Brent crude oil last week may still not fully account for the risk premium. If the restrictive measures are implemented, the discount of ESPO/URALS oil types against Brent may widen, while Middle Eastern crude oil may regain a premium due to substitution demand. The current price differentials of -$3/barrel and $2.85/barrel for ESPO-Brent and DUBAI-Brent, compared to the historical highs of -$25/barrel and +$5/barrel in 2022, still have elastic space.

Disturbances in diesel supply drive overseas cracking margins stronger

Since July 2025, the Northwest European diesel cracking margin has increased by 41% year-on-year to $24.6/barrel, mainly due to market expectations that Russian diesel will gradually exit Europe. CICC estimates that 1) the recent impact on Russian crude processing volume is about 810,000 barrels/day, and if this impact becomes long-term, diesel exports may decrease by 15 million tons/year; 2) the EU will prohibit the import of refined oil directly or indirectly sourced from Russian oil, including Turkish and Indian diesel, which account for over 25% (300,000 barrels/day) of import volume. Considering the high operating rates of US refineries and the exit of European refining capacity, there may still be a gap of 8 million tons/year after overseas refineries increase their load, and East Asian refineries are expected to benefit from potential export space.

Uncertainty in domestic refining profitability increases

Since September this year, refineries using special oil types may have gained relative cost advantages due to the widening discount. For example, the refining profit of local refineries has recovered from -200 yuan/ton in 2024 to nearly 400 yuan/ton, with the operating rate having rebounded by 3 percentage points to 58% compared to the first half of the year. If the discount of special oil types increases in the future, the cost gap for domestic refining enterprises may widen. However, CICC believes that from the perspective of global market profits, the export arbitrage space of major refineries and private large-scale refining may help compensate for domestic market share competition, and profits are expected to gradually recover driven by exports.

Regarding the targets

It is recommended to pay attention to: 1) upstream oil and gas companies, such as CNOOC (00883), whose stock price implies an oil price lower than the actual price. The current stock price of 18.35 yuan implies an oil price of only $55-60/barrel, still with a high safety margin; 2) global refining profits, especially diesel profits, still have expansion space, and refineries with export quotas may benefit, such as Shanghai Petrochemical (00338), RSPC (002493.SZ), and Southeast Asian refinery HYPC (000703.SZ); 3) Energy security drives the expansion of oil and gas resources in the Middle East and Africa, leading to increased overseas revenue for oil service engineering companies, such as CNOOC Services (02883) and COOEC (600583.SH).

Risk Factors

Significant fluctuations in crude oil and refined oil prices; changes in overseas policies; geopolitical conflict risks