How Strait of Hormuz Tensions Could Boost China’s Oil Giants
Rising geopolitical tensions in the Middle East, specifically the disruption to shipping through the critical Strait of Hormuz, have sent oil prices surging. According to a March 2 report from Goldman Sachs’ Asia Pacific energy analysts, this environment is poised to significantly benefit two of China’s largest state-owned oil companies: China National Offshore Oil Corporation (CNOOC) and PetroChina.
The Geopolitical Catalyst: A Choke Point Tightens
The Strait of Hormuz is a vital artery for global energy, typically facilitating the flow of about 20% of the world’s petroleum liquids, with a large portion destined for Asian markets. Reports indicate that recent conflict has effectively halted shipping through the strait for the past week. This supply constraint triggered a historic rally in oil futures. Brent crude soared 28% last week—its biggest weekly gain since April 2020—while U.S. crude recorded its largest weekly gain since the contract’s inception in 1983.
The Goldman Sachs analysts modeled a scenario where flows through the strait drop by 50% for one month and then remain 10% lower for the following 11 months. In that case, they project Brent crude, which settled at $92.69 a barrel on March 2, could climb to $100 per barrel. Even under a more modest Brent price range of $80 to $90, the analysts estimate CNOOC and PetroChina’s full-year free cash flow could be boosted by over 10%.
Winners: CNOOC and PetroChina’s Upstream Advantage
Both CNOOC and PetroChina are rated “Buy” by Goldman Sachs. The firm’s base case, as of midday March 2, was an average Brent price of $70 for the year, suggesting the current price spike presents a meaningful upside.
The benefit stems primarily from their business models. CNOOC, with its roots in offshore exploration and production, and PetroChina, with its substantial domestic upstream (exploration and production) operations, are directly leveraged to rising crude prices. Higher oil prices typically translate to greater revenue and profit per barrel produced. Their shares reflected this optimism, hitting 52-week highs on March 3, though they later gave back some gains.
The Sinopec Contrast: A Refiner’s Dilemma
The analysts expressed a less favorable view on the third major Chinese oil giant, Sinopec. As the world’s largest refiner, Sinopec’s business is more exposed to the “crack spread”—the difference between crude oil prices and the prices of refined products like gasoline and diesel.
“For Chinese refiners like Sinopec, given the domestic product ceiling calculation mechanism does not factor in increases in international freight rates or [official selling prices], we see the net impact as skewed to the negative side,” the report stated. In a rising crude price environment, if refined product prices are capped or rise more slowly, refiners’ margins can be squeezed. Sinopec’s shares also hit a 52-week high on March 3, but the Goldman analysis suggests its fundamentals are less aligned with sustained high oil prices compared to its peers.
China’s Energy Security Context
China is the world’s largest crude oil importer, making it highly sensitive to disruptions in global shipping lanes. According to Ting Lu, Nomura’s Chief China Economist, crude oil imports transported via the Strait of Hormuz account for 6.6% of China’s overall energy consumption. Natural gas imports through the strait make up an additional 0.6%.
In response to the heightened risk, China has reportedly ordered its largest state oil refiners to suspend exports of diesel and gasoline. This move aims to preserve domestic fuel supplies amid concerns that the conflict could disrupt easy access to energy imports.
Valuation and Investment Considerations
Despite the recent rally, the Goldman Sachs analysts note that valuations for Asian upstream oil companies—including PetroChina, CNOOC, India’s ONGC, and Thailand’s PTTEP—”remain relatively discounted vs. [developed market] peers” like ConocoPhillips, BP, Chevron, and Exxon Mobil.
For U.S. investors, a regulatory caveat exists. The U.S. Treasury Department has restricted purchases of CNOOC shares since 2021. PetroChina shares do not face the same restrictions, potentially making it a more accessible vehicle for international investors seeking exposure to this thematic upside in a geopolitically sensitive market.
Data and analysis sourced from the Goldman Sachs Asia Pacific Energy report dated March 2, 2024, and commentary from Ting Lu, Nomura’s Chief China Economist. Brent crude settlement price from market data on March 2, 2024.
