High oil prices amplify upstream advantages, driving significant 2Q26 earnings divergence among China’s three oil majors

Overview

The report previews 2Q26 and 1H26 results for China’s three oil majors. Bernstein believes Middle East supply disruptions, continued inventory drawdowns, and a tight physical market will support oil prices, enabling CNOOC and PetroChina, which have higher upstream exposure, to generate strong profits and cash flow. Meanwhile, weak fuel demand, refined oil price controls, reduced exports, and petrochemical overcapacity will weigh on refining and chemical operations, putting Sinopec’s earnings under significant pressure.

Core views

The core driver of earnings divergence is differences in business mix. CNOOC has the highest earnings leverage to oil prices, with 2Q26 net profit expected to rise 69% YoY to RMB56bn; PetroChina combines strong upstream exposure with relatively resilient downstream operations, with net profit expected to rise 36% YoY to RMB51bn; while Sinopec will benefit from improved upstream profits, weakness in refining and petrochemicals is expected to drive a 43% YoY decline in net profit to RMB5.6bn. The report expects a more visible supply deficit in the oil market in 4Q26 and continues to prefer CNOOC and PetroChina, which offer double-digit free cash flow yields and dividend support.

Analysis framework

The report forecasts segment earnings and quarterly net profit by combining Brent oil price and global supply-demand balance forecasts, China’s crude oil imports and inventory changes, each company’s production and costs, refining throughput and margins, and petrochemical product output and spreads. It then determines target prices through Asia Pacific oil and gas peer valuation comparisons and a DCF model based on free cash flow through 2035.

Methodology notes

• Valuation MethodDiscounted Cash Flow Model

  Discount projected free cash flow and terminal value to estimate a company’s equity value.

  The model forecasts annual free cash flow through 2035, with terminal value assuming zero perpetual growth; oil price assumptions are US$90/bbl in 2026, US$78/bbl in 2027, and US$75/bbl long term.

• Earnings ForecastSum-of-the-Parts Analysis

  Forecast upstream, refining, petrochemical, and sales businesses separately, then aggregate group earnings.

  Upstream forecasts focus on realized oil prices, production, and unit costs, while downstream analysis examines throughput, refined oil price pass-through, exports, utilization rates, and chemical spreads.

• Industry AnalysisCrude Oil Supply-Demand Balance

  Assess oil price direction through changes in supply, demand, and various inventories.

  The report incorporates floating storage, OECD strategic reserves, China inventories, other non-OECD inventories, and supply-demand gaps into its balance analysis, arguing that once buffer inventories are depleted, commercial inventory drawdowns will intensify upside risk to oil prices.

• Relative ValuationPeer Comparison

  Compare Asia Pacific oil and gas companies on cash flow multiples, free cash flow yields, production, and reserve metrics.

  The report assesses the relative attractiveness of the three companies using P/CF, free cash flow yield, payout ratio, production growth, reserve life, and finding and development costs.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CNOOC

  Preferred beneficiary of high oil prices and tightening supply

  Strengths

  Highest earnings leverage to oil prices, low-cost assets, stable production growth, strong reserve replacement capability, net cash balance sheet, and high free cash flow yield and ROACE.

  Weaknesses

  Business is concentrated in upstream, making earnings and share price highly sensitive to changes in crude oil prices.

  Comparison

  Expected to deliver the highest 2Q26 earnings growth among the three companies and does not bear the refining and petrochemical pressures faced by PetroChina and Sinopec.

  Risks

  Oil price decline, rapid supply recovery, project delays, cost increases, or shareholder returns below expectations.

• PetroChina

  Preferred name combining upstream leverage and downstream resilience

  Strengths

  Large upstream scale, with natural gas providing growth momentum; refining and petrochemical businesses benefit from cost discipline, lower feedstock costs, and exposure to specialty chemicals and new materials; offers double-digit free cash flow yield and sustainable dividends.

  Weaknesses

  Still affected by weak domestic fuel demand and declining refining and chemical margins; the report has lowered earnings estimates and target price.

  Comparison

  Business mix is more balanced than CNOOC’s, with downstream resilience clearly stronger than Sinopec’s, but pure upstream leverage to oil prices is lower than CNOOC’s.

  Risks

  Oil price decline, natural gas prices and sales volumes below expectations, further contraction in refining and chemical margins, and capital expenditure exceeding expectations.

• Sinopec

  Relative avoid under refining and petrochemical headwinds

  Strengths

  Upstream profits will benefit from high oil prices, and the current dividend yield has some appeal.

  Weaknesses

  Largest exposure to refining and petrochemicals, facing refined oil price controls, weak fuel demand, low utilization, chemical overcapacity, and narrowing product spreads.

  Comparison

  2Q26 earnings are expected to be significantly weaker than CNOOC and PetroChina and below market consensus, with no clear catalyst for relative outperformance.

  Risks

  Prolonged weakness in refining and chemical margins could lead to further earnings downgrades and weaken the sustainability of shareholder returns.

• Brent crude oil

  Key driver of upstream earnings and relative performance for the three companies

  Strengths

  Middle East supply disruptions, inventory drawdowns, and a potential 4Q26 supply deficit provide price support.

  Weaknesses

  High oil prices may curb demand and create cost pressure for Chinese refiners subject to price controls.

  Comparison

  Bernstein’s 2026 forecast is US$90/bbl, above consensus expectations of about US$83/bbl and the forward curve’s implied level of about US$86/bbl.

  Risks

  Middle East supply recovers faster than expected, strategic and commercial inventories increase, global demand weakens, or non-OPEC supply exceeds expectations.

Key data

• 2Q26 average Brent priceUS$104/bblUp 28% QoQ and 53% YoY.
• 2026 Brent forecastUS$90/bblAbove consensus expectations of about US$83/bbl; the report sees a risk of breaking above US$100/bbl by year-end.
• CNOOC 2Q26 net profit forecastRMB56bnUp 69% YoY and 43% QoQ, above market consensus.
• PetroChina 2Q26 net profit forecastRMB51bnUp 36% YoY and 5% QoQ, but below market consensus.
• Sinopec 2Q26 net profit forecastRMB5.6bnDown 43% YoY and 68% QoQ, below market consensus.
• 2Q26 industry refining throughputDown 11% to 12% YoYAffected by weak fuel demand, slowing economic activity, rising EV penetration, and reduced exports.
• Sinopec 1H26 refining throughputDown 5.6% YoYIndicates continued operating pressure in the refining segment.
• Sinopec 1H26 ethylene outputDown 15.5% YoYReflects weak demand, overcapacity, and proactive utilization cuts.
• Sinopec 1H26 synthetic resin outputDown 16.6% YoYPetrochemical product prices have fallen faster than feedstock costs, keeping margins under pressure.
• 2026 free cash flow yieldCNOOC 14.9%; PetroChina 10.2%; Sinopec 8.3%CNOOC is the highest among the three companies.
• Target price adjustmentsCNOOC HKD33.6; PetroChina(H) HKD12.5; Sinopec(H) HKD4.0Previous target prices were HKD31.7, HKD13.2, and HKD4.5, respectively.

Impact & implications

If the oil market tightens further in 2H26, especially in 4Q26, expectations for upstream earnings, free cash flow, and shareholder returns may continue to be revised upward, with CNOOC benefiting the most and PetroChina second. For Sinopec, high oil prices are not purely positive because domestic price controls compress refining margins, while weak demand and structural overcapacity will continue to drag on petrochemicals, limiting earnings recovery and valuation upside.

Risks

• Middle East crude supply recovers faster than expected, causing oil prices and upstream earnings to fall.
• Global economic slowdown, weak fuel demand, and rising EV penetration further suppress refining throughput and refined oil product sales.
• Domestic refined oil price controls limit pass-through of high crude costs, keeping refining margins under pressure.
• New capacity in the petrochemical industry grows faster than demand, potentially further worsening product prices and spreads.
• Company production growth, cost control, capital expenditure, or new project ramp-up progress falls short of expectations.
• High dividends and shareholder returns may fall below expectations due to declining free cash flow.
• Changes in exchange rates, discount rates, and long-term oil price assumptions may lead to adjustments in DCF valuations and target prices.

What to watch

• The three companies’ 1H26 results and 2Q26 segment profits to be released at the end of August.
• CNOOC and PetroChina’s realized oil prices, production growth, unit costs, and free cash flow.
• Sinopec’s refining throughput, refining margins, ethylene output, petrochemical utilization rates, and changes in losses.
• China’s crude oil imports, refinery utilization rates, refined oil exports, and the pace of commercial and strategic inventory drawdowns.
• 4Q26 global crude oil supply-demand deficit, OECD commercial inventories, and Middle East physical flows.
• Domestic refined oil pricing policy and the degree of pass-through from high oil prices to retail prices.
• Each company’s dividend policy, share buyback plans, and capital expenditure guidance.
• Whether Brent oil prices can remain around US$90/bbl and the possibility of breaking above US$100/bbl by year-end.