The US-Iran war "devours" the profits of Shandong local refining companies, losing 153 yuan per ton processed! Previously saving $20 per barrel, now with oil prices over $100, the discount disappears overnight.

Every reporter｜Peng Fei Every editor｜He Xiaotao Zhang Yiming Yi Qijiang

In the spring of 2026, with the outbreak of the US-Iran war, international oil prices soared “over $100,” and Shandong’s local refining enterprises faced multiple pressures such as skyrocketing raw material costs, sanctions, and the impact of new energy, causing profits to plummet. Some companies were placed on the US sanctions list, making survival difficult.

Companies struggled to cope with measures like futures hedging and limiting inventory sales, while tax regulation intensified, marking the end of an era of excessive profits.

Refineries attempted to transition to fine chemicals but faced difficulties like insufficient downstream demand. In this industry reshuffle, only those who completed the integration of the industrial chain could survive.

In the spring of 2026, the early morning in Qilu still had a chill. The city was still asleep, but the futures trading rooms of several local refining enterprises in Shandong were already brightly lit, having been active all night.

With bloodshot eyes, traders were fixated on the fluctuating crude oil numbers from overseas markets, their fingers continuously tapping on the keyboard. Every fluctuation on the screen directly affected the survival of the towering refining towers behind them.

Once upon a time, relying on the price differentials from special channels, local refining enterprises in Shandong teamed up with private gas stations to write a golden era of industry growth.

Now, with international oil prices crossing the $100 per barrel mark, the previous procurement discounts vanished overnight. Coupled with increasingly stringent tax regulation and the disruptive impact of new energy vehicles, a game of strategy and transformation was silently unfolding among the refining towers in Qilu.

Root causes under pressure: oil prices “over $100” + sanctions

The raw material side is the first to be urgent

The dramatic changes on the raw material side continued to erode the profits of local refineries.

Refining facilities Image source: Every reporter Peng Fei

Several industry insiders confirmed that in the past few years, many local refineries in Shandong procured crude oil through special channels, sacrificing formal insurance to gain significant procurement cost advantages, which was the core method for survival in the industry for many years.

“Previously, purchasing this crude oil would save us $20 per barrel, but now there’s not even a penny discount.” A long-time insider in the oil system who has dealt with Shandong’s local refineries, Xue Yu (pseudonym), revealed the harsh reality of soaring crude oil costs for refineries.

Xue Yu explained that the current global crude oil supply remains tight, and crude oil from Russia and Iran has transformed from “unpopular discounted goods” to targets for global buyers. Coupled with the US granting temporary exemptions on some already shipped crude oil, buyers from around the world flooded in, resulting in the complete disappearance of previous procurement discounts, with prices fully aligning with international benchmark oil prices.

This industry predicament was also confirmed by Zhang Liucheng, former vice president of Dongming Petrochemical and current secretary-general of the Shandong Provincial High-end Chemical Industry Development Association. He calculated for reporters: Previously, when international oil prices were at $60 per barrel, plus a $10 procurement discount, the cost of crude oil at the dock was just over $50 per barrel; now, with international oil prices exceeding $100 per barrel, not only has the crude oil price doubled, but freight and other additional costs have also risen, directly causing a doubling of the enterprise’s working capital needs.

The surge in refining costs has directly plunged the processing profits of local refineries to rock bottom. According to monitoring data from Jinlianchuang, as of the week of March 18, the theoretical profit from processing imported crude oil for Shandong’s local refineries dropped to -153 yuan per ton, a significant decline of 553 yuan per ton compared to the previous period, with the spot refining business already in a state of comprehensive loss.

In addition to soaring costs, there are secondary sanction risks arising from geopolitical tensions, which could sever the lifeline of enterprises at any moment. The dual pressure has placed the raw material side of Shandong’s local refineries under unprecedented “food shortage” risks.

Reports from the China Energy News indicated that in 2025, several local refineries in Shandong were placed on the US sanctions list, with the direct reason for the sanctions being their procurement of Iranian crude oil.

Refining facilities Image source: Every reporter Peng Fei

“The long-arm jurisdiction of the US has directly cut off the dollar settlement channels for enterprises, leaving sanctioned companies with basically no international trade capability and financing channels subsequently severed,” a former executive at HSBC Petrochemical revealed the deadly impact of sanctions to reporters from the Daily Economic News.

Zhang Liucheng expressed similar concerns: Once a company is placed on the sanctions list, banks become unwilling to cooperate with it, leading to financing difficulties. In the short term, relevant local refineries face restricted raw material supplies and may turn to crude oil from Russia, Africa, and South America, needing to establish new transportation and trade channels, facing increased costs and pressure to reconstruct the supply chain.

The continuous losses on the spot market forced local refineries to enter the futures market.

“The crude oil delivery cycle is generally around 40 days. The crude oil procured today will not be officially delivered and put into production until over a month later.” Zhang Lei (pseudonym), a sales manager at an established refining and chemical enterprise in Shandong, explained the natural lag in refinery procurement—during current extreme oil price fluctuations, this 40-day cycle is sufficient for a procurement to turn from profit to significant loss.

Loading area of a local refinery Image source: Every reporter Peng Fei

To hedge against price volatility risks during this long cycle, futures hedging has become a necessary option for refineries. “Companies have dedicated futures hedging departments with staff monitoring the markets 24/7, continuously conducting buying and selling operations.” Zhang Lei learned from colleagues in the futures department that the team often has to stay up late monitoring overseas markets until the US market closes around 2 or 3 AM before they can relax.

This almost obsessive caution stems from a nightmare of “negative oil prices” during an extreme market event in 2020.

“That was an exceptionally special period when many Shandong refineries lost a lot of money. Oil prices kept falling, and some tried to use low-priced crude oil to dilute the costs of high-priced inventories, but as prices fell, they kept buying, eventually leading to negative oil prices,” Zhang Lei recalled. “Now, companies’ operational strategies have become extremely pragmatic; futures operations are done not only to hedge against spot losses but also to attempt to recoup profits in crude oil trading. If the spot market isn’t profitable, they can only rely on futures to compensate, which is essentially similar to stock trading logic.”

Besides the fierce competition in the futures market, managing spot inventory has also become a key bargaining chip for local refineries to navigate the future. An insider from a local refinery with annual sales exceeding 60 billion yuan revealed to reporters from the Daily Economic News that their crude oil storage capacity could reach 60,000 to 70,000 tons. Even if the production department reports that the tanks are full, the company’s planning department will still issue strict orders prohibiting the arbitrary use of inventory crude oil.

Behind this operation is the commonly used “M+2” cycle for crude oil procurement at domestic refineries—raw materials used in production in March come from crude oil purchased in January, when the procurement price was only about $60 per barrel. Based on this cycle, the current high oil price costs will only be transmitted to the refinery’s production end by the end of April or early May.

In this context, reducing the operating rate to slow down the consumption of low-priced crude oil has become a common choice in the refining industry. Jinlianchuang’s weekly report on the refined oil market released on March 19 showed that as of March 18, the operating rate of Shandong’s local refineries for crude distillation units was 62.84%, a decrease of 0.29 percentage points from the previous week; excluding large refining and chemical projects, the operating rate of Shandong’s local refineries dropped to 58.42%, down 0.32 percentage points from the previous week.

Cost increases have led local refineries to reduce their operating rates Image source: Every reporter Peng Fei

In Zhang Lei’s view, the core of this series of operations is a “gamble” regarding future oil prices: on one hand, they predict that oil prices still have room to rise; consuming low-priced crude oil now means they will face higher production costs in the future; on the other hand, this is a unified strategy for market response—“unprofitable business naturally requires less refining and selling.”

Under the recent surge in oil prices, the profit margin for private gas stations has been compressed to the extreme, and the logic of excessive profits along the entire industrial chain is collapsing.

A sales representative from HSBC Petrochemical revealed that as of March 23, the wholesale price of 92 gasoline had reached 9,700 yuan per ton, an increase of about 2,000 yuan per ton since the beginning of the month, translating to a station cost of approximately 7.2 yuan per liter, while the retail price at social gas stations is generally around 7.4 yuan per liter. Considering other costs, private gas stations currently have almost no profit margin.

Gas stations under local refineries Image source: Every reporter Peng Fei

Once upon a time, private gas stations and Shandong’s local refineries formed a powerful “money printing machine.” Xue Yu revealed the industry’s former profit secrets: “The biggest difference between local refineries and major companies like Sinopec and PetroChina lies in the consumption tax segment. In the past, local refineries often manipulated the consumption tax, producing gasoline and diesel but issuing invoices as asphalt or chemical products that do not require consumption tax, a practice commonly referred to as ‘invoice conversion’ in the industry. With this operation, local refined products could be cheaper by 1.2 to 1.5 yuan per liter than legitimate channels.”

However, this long-standing industry hidden rule has nowhere to hide now. A representative from Jingbo Petrochemical told reporters from the Daily Economic News that with the national tax regulatory system increasingly improving, this “gray profit space” has become increasingly difficult to exist.

The rise in compliance costs has declared the end of the era of excessive profits for local refineries and private gas stations. Faced with price caps on refined oil and high crude oil costs, many refineries and private gas stations have started a “selective product exchange” model to survive.

Zhang Lei revealed this little-known survival logic within the industry to reporters: “Since No. 0 diesel cannot fetch a good price and is not profitable, we may produce less or even stop producing No. 0 diesel and instead produce more profitable -10 diesel or 95 gasoline.” He explained that the production costs of different grades of oil products are not significantly different, but the terminal prices of -10 and -20 diesel are higher, providing a more favorable profit margin, so refineries will prioritize the production and sale of higher-profit products.

“Refineries have no choice; if they don’t do this, they will face bankruptcy,” Zhang Lei said. This supply strategy, while allowing refineries to maintain minimal profits, directly transmits pressure to downstream entities, leading logistics companies and agricultural machinery users to experience shortages in essential oil product supplies.

If high oil prices and strict regulations are the blades hanging over the heads of Shandong’s local refineries, then the rapid penetration of electric vehicles and the proliferation of urban rail transit fundamentally undermine the survival soil for refineries and gas stations.

Zhang Lei personally felt the impact of changing commuting methods in Jinan. “Once the subway in Jinan was completed, it was clean, convenient, and not crowded; a few stops only cost a few yuan, and it was fast. I binded my payment code with Alipay, and I could get a 20% to 30% discount.”

A customer complained to Zhang Lei that their previously high reliance on private cars for commuting had shifted; light rail and subways had become the first choice, directly causing sales at gas stations along the route to drop by nearly half, with an overall shrinkage of at least one-third.

As the refining sector wanes, transitioning to fine chemicals and extending the industrial chain seems to be the only viable path for local refineries to break through. However, this path is also fraught with thorns.

Taking Sinopec as an example, in 2025, its refining division contributed operating revenue of 132.851 billion yuan, but the corresponding operating profit was only 9.095 billion yuan, far below that of the exploration and development division and the chemical division. In 2025, due to fluctuations in market prices for some products and losses from certain production units, Sinopec accrued impairment provisions totaling 13.178 billion yuan.

The large asset impairment provisions reflect the industry-wide pain point of overcapacity in the petrochemical sector. Data from the China Petroleum and Chemical Industry Federation for 2025 indicates that domestic silicone capacity has increased by 1.4 times over five years, and the operating rate in the polyether polyol industry is less than 50%; overcapacity has led to serious distortions in the pricing mechanism, with ethylene prices under $80 per barrel being on par with those when oil was $50 per barrel.

“The industry situation is forcing you to transition to fine chemicals, but this path is not easy. Currently, it is clearly unrealistic to transition through large-scale debt financing,” a former executive who switched to the new energy sector last year told reporters from the Daily Economic News.

Zhang Liucheng also pointed out that the core of the refinery’s transformation is the shift towards producing chemical raw materials like ethylene, propylene, and PX, but the ongoing downturn in the downstream chemical industry and real estate market has directly led to a continuous decline in demand for plastics and chemical raw materials, making it impossible to realize returns on the extended industrial chain transformation in the short term.

Amid the policy-driven wave of capacity replacement, Shandong’s local refining industry has shown a clear pattern of polarization. Xue Yu pointed out that Shandong has shut down many small refineries and has integrated large-scale refining and chemical projects like Yulong Petrochemical, which boasts a capacity of 20 million tons, focusing on a transformation route of “reducing oil and increasing chemicals.” However, for established local refineries like Dongming Petrochemical and Jingbo Petrochemical, the pace of transformation is relatively slow due to existing production equipment constraints, and their main business still revolves around refining.

With the terminal market continuously being eroded by new energy, and the industry caught in the intersecting winter of global sanctions and high costs, frontline practitioners like Zhang Lei are acutely aware that the era of excessive profits for independent local refineries has quietly come to an end. In this life-and-death industry reshuffle, only those who complete the deep integration of ultra-long industrial chains and endure the painful transformation can secure a valuable ticket to the future energy landscape.

(Disclaimer: The content and data in this article are for reference only and do not constitute investment advice. Investors act based on this at their own risk.)

Reporter｜Peng Fei

Editor｜He Xiaotao Zhang Yiming Yi Qijiang