Morgan Stanley reiterates the Asia Pacific refining "Golden Age," believing supply bottlenecks and disruptions will support a higher margin midpoint

Overview

This is a Morgan Stanley research update on the Asia Pacific refining industry. The core view is that after experiencing three major shocks in six years, the fuel market remains resilient, and refining is becoming a key bottleneck in the oil ecosystem. The report believes the market is overly concerned about new refining capacity additions and underestimates the persistent tightness caused by maintenance shutdowns, geopolitical disruptions, and regional supply mismatches, so Asia Pacific refiners are likely to enjoy margins above a typical mid-cycle level.

Core views

The report's core views include: first, a global headline refinery utilization rate of around 80% does not negate the refining golden cycle, because efficiently operating refineries in Asia and the United States are already near full utilization; second, diesel and gasoline margins may remain about 20% above pre-conflict levels even after the conflict; third, the new mid-cycle refining margin may be about 35% higher than the past three cycles; fourth, when the oil market is better supplied in 2027, crude discounts may further increase the earnings leverage of Asian fuel refiners; fifth, core names have 40-60% upside versus market 2027 and 2028 EPS expectations.

Analysis framework

The report cross-validates the upward shift in the refining margin midpoint through dimensions including supply-demand gaps, refinery utilization, regional shutdowns, historical refining margins, company GRM, refined product consumption, crude procurement costs, and China's export quotas. Its analytical focus is not single-company valuation, but rather judging the industry's cyclical position, the policy constraints and earnings leverage of different countries, and screening for stocks most sensitive to diesel margins and the refining cycle.

Methodology notes

• Industry cycle analysisRefining mid-cycle margin framework

  Compare current and future refining margins with the average of past cycles to determine whether a higher new mid-cycle has formed.

  The report argues that the market prices refining stocks using old-cycle margins, but that supply disruptions and insufficient new capacity mean the new mid-cycle margin could be about 35% higher than the past three cycles.

• Supply-demand balanceIncremental demand versus new capacity comparison

  Compare incremental fuel demand over the next three years with refining capacity growth to judge whether industry supply is tightening.

  The report cites about 2.5mbpd of incremental demand versus less than 1.5mbpd of capacity growth, supporting the view that refining supply-demand conditions will continue to tighten.

• Earnings sensitivityDiesel margin sensitivity

  Use a US$1/bbl change in diesel margins to measure companies' earnings leverage.

  The report states that every US$1/bbl increase in diesel margins could have about a 20-30% earnings impact on core names such as TOP TB, SPRC TB, S-Oil, HPCL NS, AMPOL, and BCP TB.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• TOP TB / TOP.BK

  One of the Thai beneficiaries of the refining cycle

  Strengths

  High exposure to upside in middle distillates and refining margins; the report includes it among core names.

  Weaknesses

  Higher crude procurement costs may offset part of the improvement in benchmark crack spreads.

  Comparison

  Thailand and South Korea are viewed in the report as relatively pure beneficiary markets in the Asia Pacific refining upcycle.

  Risks

  Higher crude procurement costs, policy restrictions, declining crack spreads.

• SPRC TB / SPRC.BK

  One of the Thai beneficiaries of the refining cycle

  Strengths

  The report lists it as a core beneficiary of rising diesel margins.

  Weaknesses

  Profits are still affected by crude procurement and fuel loss costs.

  Comparison

  Like other Thai refiners, it offers relatively pure exposure to the refining cycle.

  Risks

  Refining margins below expectations, rising input costs, regional supply recovery.

• S-Oil / 010950.KS

  South Korean beneficiary of the refining cycle

  Strengths

  The report identifies the South Korean market as one of the purer ways to participate in the refining golden cycle, and S-Oil's disclosure page shows the latest rating history as O/I, with a target price history of 160000 KRW on 2026-07-10.

  Weaknesses

  The company's GRM has historically been volatile, remaining at low levels in 2024 and 2025 before rebounding in 1Q26.

  Comparison

  Similar to Thailand, South Korea faces fewer challenges such as windfall profit taxes on fuel.

  Risks

  Regional demand slowdown, restoration after refinery shutdowns, volatility in crude prices and procurement costs.

• HPCL NS

  Indian beneficiary of the refining cycle

  Strengths

  The report says India has the world's highest new capacity additions, and HPCL is listed as a core beneficiary.

  Weaknesses

  India's diesel and gasoline refined product margins are capped at around US$20-25/bbl.

  Comparison

  Compared with Thailand and South Korea, India has a stronger capacity growth advantage but more visible policy cap constraints.

  Risks

  Government price controls, caps on refined product margins, demand or policy changes.

• AMPOL

  Australian refining and fuel retail-related name

  Strengths

  The report lists it as one of the core beneficiaries of rising diesel margins.

  Weaknesses

  Australian companies are also affected by fuel retail margin factors, so the transmission of the refining cycle is not entirely pure.

  Comparison

  Compared with Thai and South Korean names, Australian companies also include retail-side dynamics.

  Risks

  Changes in retail margins, crude procurement costs, declining refining margins.

• BCP TB / BCP.BK

  One of the Thai beneficiaries of the refining cycle

  Strengths

  The report includes it among core names, and the disclosure table rates Bangchak Corporation Public Company as O.

  Weaknesses

  As with peers, higher benchmark spreads may be offset by crude procurement and fuel loss costs.

  Comparison

  Thai refiners are viewed as high-beta representatives of the Asia Pacific refining upcycle.

  Risks

  Higher crude procurement costs, policy or tax changes, downside in crack spreads.

Key data

• Incremental demand over the next three yearsabout 2.5mbpdThe report says this demand increase exceeds less than 1.5mbpd of new capacity, indicating tighter supply.
• New capacityless than 1.5mbpdUsed to support the view that the market overestimates new supply.
• Global refinery utilizationabout 80%The report believes this figure masks the fact that efficient refineries are near full utilization.
• Utilization at most refineries in Asia and the United Statesabout 95% on average over the past three yearsSome refineries in India, Thailand, and Malaysia reported utilization above 100%.
• Post-conflict diesel and gasoline marginsabout 20% higher than pre-conflictThe report believes margins will remain above historical levels even after the conflict ends.
• New mid-cycle marginabout 35% higher than the past three cyclesDriven jointly by supply disruptions and underestimated capacity.
• Dubai discount versus Brentclose to US$6/bblThe report views this as a potential upside factor on the crude procurement side for Asian refiners.
• China refined product export quotadown from 59mnt in 2020 to an annualized level of about 32mnt in 2025The decline in export quotas suppresses utilization at non-state-owned refineries.
• EPS upside for core names40-60% above market 2027 and 2028 expectationsApplies to the core refining beneficiaries listed in the report.

Impact & implications

If the report's view is correct, valuations of Asia Pacific refining stocks may still not fully reflect the higher margin midpoint, especially for companies more sensitive to diesel crack spreads, high refinery utilization, and crude discounts. From an investment perspective, Thai and South Korean refiners are seen as purer cyclical beneficiaries; Indian refiners benefit from high new capacity additions but are constrained by caps on refined product margins; Japanese and Australian companies also need to consider fuel retail margin factors. A rise in China's exports is a common market counterargument, but the report believes China's refinery export advantage and domestic demand backdrop are insufficient to overturn the refining golden cycle.

Risks

• If new refining capacity comes online faster than expected, it could weaken the tightening supply-demand thesis.
• If conflict-related supply disruptions ease quickly, diesel and gasoline crack spreads could decline.
• If China's refined product exports increase significantly, this could pressure Asia Pacific refining margins.
• Weak domestic fuel consumption in China could affect regional demand expectations.
• Higher crude procurement costs and fuel loss costs could offset higher benchmark crack spreads.
• Caps on refined product margins and policy intervention in markets such as India could limit company earnings leverage.
• The report discloses that Morgan Stanley has investment banking or other service relationships with some covered companies, and investors should pay attention to potential conflicts of interest.

What to watch

• Whether incremental fuel demand over the next three years continues to approach about 2.5mbpd.
• Whether global new refining capacity remains below about 1.5mbpd.
• Whether refinery utilization in Asia and the United States remains at high levels.
• Whether refinery maintenance and unplanned shutdowns continue to create supply constraints.
• The stable level of diesel and gasoline crack spreads after conflict easing.
• Whether the Dubai discount versus Brent persists, providing crude-side benefits to Asian refiners.
• Changes in China's refined product export quotas, actual export volumes, and independent refinery operating rates.
• Quarterly GRM and 2027-2028 EPS expectation revisions for refiners in Thailand, South Korea, India, and Australia.