The underground thermal fluid is one of the significant factors controlling the formation and quality of reservoirs. The Huangliu Formation (N1h) in YF1 area of the central depression belt in the Yinggehai Basin, South China Sea, is characterized by intense thermal fluid activities related to mud diapir and large-scale shallow-water gravity flow deposits. The multi-episodic invasion of high-temperature and CO2-rich thermal fluid into the formation induces complex water-rock reaction during diagenetic process, providing a preferable investigation opportunity for revealing how thermal fluid affects reservoir quality. This study characterizes the reservoirs in the formation through core and thin section analyses as well as physical property test. The reservoirs are dominated by fine-grained sandstone characterized by medium porosity (15.2–21.3%) and lower permeability (0.56–15.75mD). Based on an analysis of casting thin section, cathode luminescence (CL), scanning electron microscope (SEM), carbon and oxygen isotope, inclusion test, and electron-probe microanalysis (EPMA), we systematically investigate the diagenetic patterns and pore evolution process for the reservoirs in the formation. The episodic invasion of thermal fluid occurred approximately 0.4 Ma ago plays an important role in controlling reservoir development: The CO2-rich formation water induces massive late-stage dissolution, resulting in a higher proportion of dissolved pores (38.7–46.4%), which improves the porosity of reservoirs at a depth of 2600–3100 m. Nevertheless, the late dissolution together with carbonate cementation occurred in closed diagenetic system blocks most seepage channels. Furthermore, the relatively high level clay mineral transformation in the YF1 area leads to a higher content of authigenic illite (44–62%) in the formation. Massive authigenic illite severely blocks the pore throats in fine sandstone, reducing permeability. This study offers an insight to the understanding of mud diapir-derived thermal fluid affecting and controlling the quality of reservoirs in some areas of the Yinggehai Basin.