Shares of China Petroleum & Chemical (SNP.US), more commonly known as Sinopec, took a hit amid recent rout on the Chinese stock exchange. However, regulations that were the trigger for the move did not relate to the oil industry in any way. Stock of Sinopec began to underperform as new pandemic restrictions imposed in China threaten to impact domestic oil demand. Let's take a closer look at the stock.
Sinopec, officially China Petroleum & Chemical (SNP.US), is the largest oil company in China. It is the largest oil refiner in Asia and the second largest crude oil producer in China (after PetroChina). Stock of the state-owned oil behemoth has been underperforming recently, in-line with the broad chinese market (CHNComp, light blue overlay on the chart below). Recent rout on the Chinese stock exchanges have been triggered by concerns over regulations of the tech and educational sector. In neither case, oil companies were not a target. From this point of view, it looks like at least part of recent weakness in Sinopec shares may have been unjustified. Moreover, correlation between Sinopec (SNP.US) and oil price (OIL, yellow overlay on the chart above) also stopped working, with Sinopec lagging performance of crude.
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Source: xStation5
Pandemic worsens in China
However, recent weakness in Sinopec shares can be justified otherwise. Pandemic situation in China began to deteriorate and Chinese authorities are quick to impose restrictions to combat local outbreaks. Delta variant outbreaks have been registered in more than half of all Chinese provinces, leading Beijing to impose more travel curbs and local lockdowns. As a result, traffic activity across the country has been limited. Number of seats offered by airlines dropped by a quarter over a week while car traffic is smaller in all major cities. This is a negative for Sinopec whose operations are to a huge extent limited to China. Company has already responded to a drop in demand by lowering run rates in its refineries across the country by 5-10%, compared to July levels.
Financials are improving after pandemic
Unsurprisingly, Sinopec has been hit heavily by the coronavirus pandemic in 2020. Revenue dropped 22.8% YoY in Q1 2020, by 39.2% in Q2 2020, by 27.5% in Q3 2020 and by 24.9% YoY in Q4 2020. While revenue in the first quarter of 2021 was just slightly higher than in pandemic-hit Q1 2020, sales in Q2 2020 are expected to have increased 40% YoY. EBITDA remained positive throughout 2020 but has yet to reach pre-pandemic levels. Meanwhile, net income has already recovered to the levels not seen in years.
Sales of Sinopec are slowly recovering from the pandemic drop but the company's net profit has already climbed to the levels not seen in years. Source: Bloomberg, XTB
Technical Analysis
Sinopec (SNP.US) took a hit during the first half of 2021, just like the broad Chinese market. Stock managed to halt declines recently at the support zone marked with 61.8% retracement of the upward move launched in October 2020 and began to trade sideways. In case bulls managed to launch an upward impulse the $48.25 zone marked with 50% retracement will be the first resistance to watch. Key resistance can be found at $51.85 and is marked with the upper limit of the market geometry. Note that the 50-session moving average is about to break below the 200-session moving average and paint the so-called death-cross. This is a bearish technical pattern but it often lags the drop itself so it's not very reliable.
Investors can get exposure to Chinese oil stocks via US depositary recipes. Sinopec and PetroChina can be found in the xStation platform under symboles SNP.US and PTR.US, respectively.
Source: xStation5
