Wang Dongjin, president of PetroChina Co.

Photographer: Jerome Favre

PetroChina, Sinopec Amp Up Oil Fears

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.
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If you invest in PetroChina and Sinopec, it should bother you that they both had dreadful third quarters. But even if you don’t invest in the two Chinese oil majors, some numbers buried in their results should worry you.

Like Royal Dutch Shell -- another major reporting woeful numbers on Thursday -- both Sinopec and PetroChina have seen the bulk of their profits evaporate as oil plunged below $50 a barrel. Both need to rein in operating costs and investment as a matter of urgency.

That’s on them. The figures with wider resonance concern how much fuel the two companies are actually selling in China.

That matters a lot, for two reasons. First, it’s China. There isn’t a commodities investor or economist alive whose thoughts don’t drift to that country’s fortunes at least a few times a day. Second, getting a fix on oil demand in China is frustratingly difficult. So market watchers piece it together from customs data, car-buying trends, witchcraft -- and the sales figures of the two behemoths bestriding the country’s fuels market.

Their latest numbers aren’t cause for outright panic, but they add to existing anxiety around the Chinese economy and the global oil market. Both Sinopec and PetroChina saw sales volumes fall in the third quarter by 4.1 and 2 percent, respectively, compared to the same period in 2014. Combined, the drop was 3.1 percent.

There was a bigger drop in early 2014, as the chart below shows. But look at that trend.

That is echoed in the next chart, which smooths out the swings by showing combined fuel sales for PetroChina and Sinopec in million tonnes on a trailing four-quarter basis.

Again, we saw sales level off through 2013 and early 2014. They could pick back up from the latest reversal. Typically, though, the two companies’ fuel sales fall in the fourth quarter compared to the third. They did increase in the final three months of 2014, but that was the only year where that happened out of the past five.

This sets up a critical test for the current quarter. Since 2011, growth in fuel sales for the two firms combined has slowed every year. It hit 2.2 percent in 2014, down from 13.5 percent in 2011. Based on the amount sold in the first nine months of 2015, PetroChina and Sinopec would need to see combined fuel sales rise by about 2 percent in the current quarter to make sure that overall growth for the year doesn't dip to zero. 

Again, 2 percent in the fourth quarter doesn’t sound like a lot. It would just be unusual compared with recent history. And given China’s starring role in global oil models, economic forecasts, and myriad investment portfolios, the unusual should provoke uneasiness.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net