Asia's refining cycle remains in a 'golden age,' with mid-cycle margins underestimated

Overview

This report responds to market skepticism about the 'golden age of refining.' Its core conclusion is that although global refinery utilization appears to be only about 80%, the complex refineries that can truly operate at high loads are already near full capacity, and refining remains the bottleneck in the oil products system. Demand resilience, limited new capacity, maintenance shutdowns, geopolitical disruptions, and crude discounts together support Asian refiners in sustaining margins above historical mid-cycle levels.

Core views

The report's core views include: first, the upturn in refining margins does not rely entirely on conflict-related disruptions; Asian fuel margins have strengthened continuously since 2021, and refinery-level earnings have risen nearly 50% over five years. Second, new demand over the next three years will be about 2.5mbpd, while capacity growth will be below 1.5mbpd, so the tightening supply-demand balance is continuing. Third, the new mid-cycle margin could be 35% higher than the past three cycles, and the market's EPS expectations for key refining stocks in 2027-2028 are too low. Fourth, Thai and Korean refineries have the highest sensitivity to margins; India is constrained by caps on refined product margins but benefits from capacity expansion; Japan and Australia are more influenced by the profit structure of fuel retailing. Fifth, higher Chinese exports are insufficient to break the cycle, because export quotas are declining, domestic demand is weak, and the crude discount advantage of teapot refineries is narrowing.

Analysis framework

The report uses cross-validation across the industry supply-demand framework, refinery utilization, maintenance shutdowns, crack spreads, crude discounts, regional policy constraints, and company margin sensitivity, and compares new demand, capacity growth, global and Asian refining margins, different refinery GRMs, and diesel margin sensitivity through key exhibits.

Methodology notes

• Industry cycle analysisRefining mid-cycle margin framework

  Assess whether the new equilibrium level has shifted upward through historical cycle averages, current annual margins, and the supply-demand gap.

  The report believes Asian refiners' current annual margins are about 20% above the average of past cycles, and judges that the new mid-cycle margin may be 35% higher than the past three cycles.

• Supply-demand balanceComparison of oil product demand growth and refining capacity additions

  Use the gap between incremental demand and incremental capacity to measure industry tightness.

  The report states that new demand over the next three years will be about 2.5mbpd, while capacity growth will be below 1.5mbpd, indicating insufficient supply elasticity in the industry.

• Equity sensitivityDiesel margin sensitivity analysis

  Estimate the earnings impact on key refining stocks from each US$1/bbl increase in diesel margins.

  The report says that each US$1/bbl increase in diesel margins implies an impact of about 20%-30% for key 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 / Thai Oil Public Company

  One of the core exposures to Thailand's refining upcycle

  Strengths

  Sensitive to diesel and middle distillate margins, and positioned in the Thai pure refining cycle theme emphasized by the report.

  Weaknesses

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

  Comparison

  Like other Thai refineries, it benefits from rising margins, but crude sourcing costs need to be compared.

  Risks

  Fuel pricing policy, crude premiums, maintenance shutdowns, and regional demand volatility.

• SPRC TB / Star Petroleum Refining

  A Thai name with refining margin sensitivity

  Strengths

  The report says Thai refineries are the most sensitive to fluctuations in refining margins.

  Weaknesses

  Gross margin improvement may be offset by higher crude procurement costs.

  Comparison

  Along with Thai Oil and Bangchak, it is a beneficiary of Thailand's refining cycle.

  Risks

  Crude procurement costs, weaker crack spreads, and policy changes in Thailand.

• S-Oil (010950.KS)

  Korean refining cycle exposure

  Strengths

  Korea is viewed in the report as a relatively pure market for the refining upcycle, and S-Oil's latest target price in the rating history was raised to 160,000 KRW.

  Weaknesses

  Highly affected by global oil product spreads, exchange rates, and regional demand.

  Comparison

  Compared with Indian refiners, which are more clearly constrained by margin controls, Korean refiners have more direct cyclical transmission.

  Risks

  Weaker crack spreads, rising crude costs, and supply recovery after easing geopolitical conflict.

• HPCL NS

  Indian refining and refined products exposure

  Strengths

  India has relatively high new capacity additions globally, supported by strong demand growth.

  Weaknesses

  Diesel and gasoline product margins are capped at about US$20-25/bbl, weakening the transmission of higher margins.

  Comparison

  Compared with Thai and Korean refineries, Indian names face more policy constraints but benefit from capacity expansion.

  Risks

  Government price controls, subsidy policies, and crude import costs.

• Ampol Ltd

  Australian fuel retail and refining-related exposure

  Strengths

  Can still benefit from higher fuel crack spreads during the upcycle.

  Weaknesses

  Earnings transmission is affected by fuel retail margin dynamics.

  Comparison

  Less pure than Thai and Korean refineries, with a more mixed exposure to fuel retail and refining.

  Risks

  Retail margin compression, crude costs, and changes in Australian demand.

• BCP TB / Bangchak Corporation Public Company

  A beneficiary of Thailand's refining cycle

  Strengths

  Included among the key refining margin-sensitive names listed in the report.

  Weaknesses

  Like peers, improvement in benchmark spreads may be offset by higher procurement and fuel loss costs.

  Comparison

  Like Thai Oil and SPRC, it is a Thai refining-sensitive asset.

  Risks

  Crack spread volatility, cost offsets, and changes in policy and taxation.

Key data

• Global refinery utilizationAbout 80%The report uses this data point to respond to market skepticism about the 'golden age,' but emphasizes that refineries capable of sustained high-load operation are actually much tighter.
• Average utilization of major Asian and U.S. refineries over the past three yearsAbout 95%Some refineries in India, Thailand, and Malaysia reported utilization above 100%.
• Incremental oil product demand over the next three yearsAbout 2.5mbpdHigher than the capacity growth of below 1.5mbpd mentioned in the report.
• Current Asian refinery margins versus historical cycle averageAbout 20% higherExhibit 5 indicates annual refining margins have been more stable than expected.
• View on the new mid-cycle margin35% higher than the past three cyclesBased on the view that the market overestimates supply and underestimates supply disruptions.
• Upside to 2027-2028 EPS for key names40%-60%Potential upside relative to Street expectations.
• Diesel margin sensitivityUS$1/bbl corresponds to about 20%-30% impactApplicable to the key refining stocks listed in the report.
• Change in China's fuel exportsUp about 12% from 2012-2022, then broadly flatThe report believes Chinese exports are unlikely to break the refining upcycle.
• China export quotasFrom 59 million tons in 2020 down to about 32 million tons utilization in 2025Constrains utilization at non-state-owned refineries.
• Dubai discount relative to BrentClose to US$6/bblThe report believes the crude discount can add another layer of upside for Asian fuel refiners.

Impact & implications

If the report's view is correct, earnings expectations for Asian refining stocks still have room for upward revision, especially for refineries with high sensitivity to refining margins, limited policy headwinds, and better complexity and hardware upgrades. From an investment perspective, Thai and Korean refiners offer more direct exposure to the refining cycle; Indian refiners are constrained by price controls but can benefit from capacity growth; and the returns of Japanese and Australian refiners depend more on fuel retail margins and the transmission of crack spreads.

Risks

• If global refining capacity additions come online faster than the report expects, mid-cycle margins could be pressured lower.
• If geopolitical conflicts ease and supply disruptions diminish, diesel and gasoline crack spreads may decline.
• Higher crude premiums or procurement costs may offset improvements in refining gross margins.
• If China's fuel exports rise sharply again, regional oil product supply-demand tightness in Asia could weaken.
• Product margin caps and government intervention in markets such as India may limit refinery earnings sensitivity.
• Annual refinery maintenance and major turnarounds every three to four years may affect actual utilization and earnings realization.
• The report discloses that Morgan Stanley has investment banking or other service relationships with several covered companies, and investors should consider potential conflicts of interest.

What to watch

• Whether oil product demand growth over the next three years continues to exceed new refining capacity additions.
• Whether actual utilization at Asian and U.S. refineries remains near the high level of 95%.
• Whether diesel, gasoline, and middle distillate crack spreads can remain above pre-conflict levels.
• Whether the Dubai discount to Brent persists, giving Asian refineries a crude cost advantage.
• Changes in China's fuel export quotas, export volumes, and domestic fuel demand.
• Changes in policy, taxation, and retail margin transmission in Thailand, Korea, India, Japan, and Australia.
• Revisions to 2027-2028 EPS expectations for key names such as TOP TB, SPRC TB, S-Oil, HPCL NS, Ampol, and BCP TB.