China's Refining Resurgence: Bullish Energy Prices Amid Strategic Shifts

The resurgence of China's state-owned refineries in early 2025 has reignited debate over the trajectory of global energy prices. While concerns about electric vehicle (EV) adoption and stagnant fuel demand linger, the data paints a compelling case for a bullish outlook—driven by margin recoveries, surging crude imports, and strategic inventory buildup. For investors, this dynamic presents a window to capitalize on upstream oil producers and storage assets, though risks remain.

The Margin Turnaround: State-Owned Refiners Lead the Charge

State-owned refineries in China have emerged as a critical catalyst for the energy sector's rebound. In June 2025, their profit margins hit 1,121 yuan per ton, a staggering 83% jump month-on-month and 155% higher year-on-year. This surge was fueled by falling crude costs—down 306 yuan per ton—and rising product prices, particularly for gasoline and jet fuel.

The utilization rate for these refineries climbed to 79.95% in June, up 5.3 percentage points from May, as post-maintenance restarts and peak summer travel demand boosted throughput. Analysts now project a third-quarter average utilization rate of 83.5%, suggesting margins may stay elevated through July and August.

Crude Imports Surge Amid Strategic Restocking

Crude imports surged to 12.14 million barrels per day (bpd) in June—7.1% higher month-on-month and the highest since August . This surge was driven by discounted crude from Saudi Arabia and Iran, which became more attractive as Brent prices dropped to four-year lows in May.

Despite geopolitical tensions (e.g., Israel-Iran conflict, U.S. tariff threats), refiners maintained high import volumes to rebuild fuel inventories, which had dipped to six-year lows. Barclays estimates annual oil demand growth will ease to 150,000 bpd for 2025 from 330,000 bpd in the first half, but export quotas and restocking needs are likely to keep imports steady.

Inventory Buildup: A Double-Edged Sword

The June crude surplus (imports + domestic production minus refinery throughput) hit 1.42 million bpd—the highest since 2020—marking the fourth consecutive month above 1 million bpd. This surplus provided refiners flexibility to trim imports if prices spiked, but it also highlighted the risk of overstocking.

While elevated inventories could pressure prices if global demand weakens, they also position refiners to capitalize on future price spikes. Analysts note that not all surplus crude was stored; some may have been processed in unofficial facilities, suggesting refinery throughput could remain robust even as imports moderate.

Risks: EVs and Diesel Demand Stagnation

The bullish narrative faces two critical headwinds. First, electric vehicle adoption in China is accelerating, with EVs now accounting for 40% of new car sales in 2025. While gasoline demand from private vehicles remains strong (driven by tourism), diesel demand has stagnated due to weak construction activity.

Second, global crude prices have fluctuated sharply in 2025, with Brent dropping to $68.71/bbl by July after peaking at $81.40/bbl in June. This volatility could deter refiners from locking in long-term crude purchases, potentially limiting margin growth.

Investment Implications: Upstream and Storage

The data points to two strategic opportunities:
1. Upstream oil producers: Companies like CNOOC and PetroChina stand to benefit from sustained crude demand. Their profitability is directly tied to Brent prices, which are underpinned by China's restocking and refining activity.
2. Storage and logistics assets: Firms with exposure to crude storage (e.g., CNPC's storage facilities) or pipeline infrastructure could profit from inventory buildup and the need to transport rising volumes.

Conclusion: A Bullish Call, With Caution

China's refining sector has shifted from a drag on energy prices to a driver of demand. Strong margins, record imports, and strategic inventory accumulation suggest energy prices will remain resilient in the near term. However, investors must monitor EV adoption and diesel demand trends closely—both could erode the bullish case over the long term.

For now, the playbook is clear: tilt toward upstream equities and storage assets, but keep a close eye on geopolitical risks and the EV revolution. The refining rebound is a golden opportunity—but not one to overstay.