Sinopec's Profit Edges Up Amid Record Oil Production and Shifting Demand Dynamics

Sinopec (SHANGHAI: 600028) has managed to bolster its net profit by 2.6% in the first half of the fiscal year, a performance marked by unparalleled oil and gas production levels despite waning demand for refined fuels and petrochemical products in China. The company, formally known as China Petroleum & Chemical Corp, declared a net income of approximately 37.1 billion yuan (around $5.21 billion) for the period spanning January to June, as revealed in a report submitted to the Shanghai Stock Exchange.

In a remarkable display of resilience, Sinopec reported record oil and gas output, achieving a monumental 257.66 million barrels of oil equivalent. This figure represents a 3.1% increase compared to the same time last year, primarily driven by a surge in natural gas production, which saw a gratifying 6% rise to reach 700.57 billion cubic feet. Freezing out competition in the refining sector, the company also recorded a minor bump in crude oil output, which climbed by 0.6% to 140.53 million barrels.

Sales of refined products experienced a modest 2.1% uptick, totaling 119 million metric tons. However, a contrasting trend emerged in the domestic segment, where sales dived by 2.5% to 90.14 million tons. Revenue also faced headwinds, slipping by 1.1% to 1.58 trillion yuan, largely due to sluggish diesel and petrochemical sales. Financial analysts at Citi articulated concerns over the declining demand for diesel, with sales plummeting by 13.8% year-on-year, while gasoline sales diminished slightly by 0.2%. On a brighter note, aviation fuel sales surged by 7.5%.

In response to these shifting market dynamics, Sinopec is strategically ramping up its involvement in liquefied natural gas (LNG) refueling and electric vehicle charging infrastructure to counteract the decline in diesel demand and the broader movement toward electric vehicles. Moreover, the company noted a 10% year-on-year increase in China's apparent natural gas consumption during the first half of 2023. In contrast, consumption of refined products experienced a minor downward shift of 0.5% over the same period.

Looking ahead, Sinopec anticipates that its crude oil throughput will remain relatively stable for the latter half of the year at approximately 126 million tons, mirroring the figures from the first half. The firm processed 126.69 million metric tons of crude oil from January to June, averaging about 5.08 million barrels per day. This represents a slowdown from the 1.7% growth witnessed in the first quarter, attributed to rising crude prices juxtaposed with tepid domestic fuel demand.

Compounding these challenges, the production of ethylene, a critical component in the petrochemical sector, dropped by 5.5% during the first half of the year. Investment in capital expenditures also saw a downturn, decreasing to 55.9 billion yuan from 74.67 billion yuan in the corresponding period of 2023 as Sinopec tapered its spending on the chemicals segment. Analysts from Citi have cautioned that third-quarter results may reflect a dip compared to the second quarter, influenced by inventory losses and a retreat in oil prices.