China Refining and Gas Import Margins to Improve in 2023

China Refining and Gas Import Margins to Improve in 2023

Fitch Ratings-Shanghai/Hong Kong-08 March 2023: Chinese oil refineries’ margins are likely to recover in 2023 on a smoother cost pass-through, higher exports and a domestic demand rebound, Fitch Ratings says.

National oil companies’ (NOCs) gas import losses may also narrow as import costs decline.

Domestic fuel consumption is set to recover in 2023, especially in gasoline and jet fuel due to a low base and increase in road and air travel, partially offset by rising electric-vehicle penetration.

Diesel demand growth will taper from 2022’s high base and hinges on the industrial demand recovery, which we expect to be more modest than the consumption recovery.

Fitch also expects higher exports to support NOCs’ refining margins. A generous first batch of China’s 2023 export quota will allow refineries to earn higher export margins after year-on-year crack spreads widened to a record high despite extreme volatility.

Russian refined oil products’ export ban, China’s reopening and global refinery shutdowns should support crack spreads in 2023, though export demand could be dampened by global recessionary risks.

NOCs incurred gas import losses in 2022 as higher costs could not be fully passed through. However, we expect gas import losses to narrow in 2023 on potential import cost declines as crude prices fall and the gas shortage eases in Europe.

Fitch expects downstream-focused China Petroleum & Chemical Corporation’s (Sinopec, A+/Stable, Standalone Credit Profile (SCP): a-) financial profile to strengthen in 2023. Steady upstream performance mitigated weak downstream performance in 2022.

We expect further improvement in EBITDA net leverage for upstream-focused PetroChina Company Limited (A+/Stable, SCP: aa-) and its parent, China National Petroleum Corporation (A+/Stable, SCP: aa-), and CNOOC Limited (A+/Stable, SCP: a).

By FitchRatings, March 15, 2023