Mixed Bag For Chinese Oil Majors

Prominent Chinese refiners Sinopec (SNP) and PetroChina Company Ltd. (PTR) are set to release solid quarterly earnings on the back of an increase in fuel prices.

China raised gasoline and diesel prices twice in June in order to track international crude prices. The increase in fuel prices gives refiners a guaranteed profit margin if crude price stays below $80 a barrel. Global demand is unlikely to push prices of crude above $80 a barrel this year, so the refiners’ margins are assured.

Refiners had been witnessing a weakness in margins due to an increase in crude prices and the government’s conservative role in the pricing of refined products, particularly gasoline and diesel. The government caps the prices of refined products to control inflation. These price regulations - which did not allow the company to pass on high refining costs to consumers - are one of the key reasons for refiners’ profit slide during the last year.

On the other hand, the outlook for offshore oil producer CNOOC Ltd. (CEO), which generates most of its earnings from exploration and production, remains dull with weak oil prices.

While refiners continue to garner good margins, rising costs and special levies on domestic crude oil sales as well as downstream-centric assets remain our concerns.

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