Oil and Gas

S&P cuts China state oil firms' outlook to 'negative'

Ratings agency Standard and Poor's downgraded a significant number of Chinese oil and infrastructure companies on Friday, just a day after downgrading the country's credit rating outlook.

Twenty so-called "government related corporate and infrastructure entities," or GREs, saw their outlooks revised because, S&P said in a press release "we believe their credit profiles are affected by their importance and strong links with the Chinese central government."

A red star fronts a pressure tank at the Yanlian Oil Refinery in Yan'an, 25 May 2005, north of Xian in western China's Shaanxi province.

China National Offshore Oil Corporation, China National Petroleum, China Petrochemical Corporation were among those that had their outlooks downgraded from "stable" to "negative" although the outlook ratings of 31 other GREs were unaffected.

The downgrades come hot on the heels of S&P's decision on Thursday to downgrade China and Hong Kong's credit rating outlook to "negative" from "stable," citing increasing economic and financial risks to the mainland government's creditworthiness.

An employee works on an engine at the assembly line of a car factory in Qingdao, China.
S&P cuts China, Hong Kong outlook to negative

Richard Mallinson, geopolitical analyst at Energy Aspects, told CNBC that China's oil industry was coming under increasing pressure.

"When we look at just what those Chinese state-owned enterprises have done with their outlook for the year, they're talking about oil production falling 4-5 percent, they've really slashed their capex (capital expenditure) and that's a picture that's replicated across most of the upstream globally. So you can understand why there are concerns at these price levels about their finances and their situation," he said.

"For China, it means that they're becoming increasing(ly) dependent on imports…so we're seeing huge crude import numbers by the country and that helps other parts of the market clear in terms of crude but it means we end up with too much diesel produced by those (Chinese) refineries coming back into the regional market so it's a picture with many different pieces."

China has not been immune to a global glut in oil supply that has caused oil prices to fall dramatically over the last 18 months and a slowdown in the Chinese economy has weakened demand for oil, hitting markets further.

There were hopes that a meeting between OPEC and non-OPEC producers on April 17 in Qatar could see major producers agree to cut production. When the meeting was announced, oil prices rallied but the rally has lost momentum as expectations of any output cuts have faded. Data has shown that U.S. crude oil inventories continue to build. Benchmark Brent crude futures are currently trading at $40.10 a barrel, West Texas Intermediate (WTI) at $38.06 a barrel.

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Energy Aspects' Mallinson thought that any agreement was unlikely, and that price fluctuation would continue. "Volatility is still going to be with us in the second quarter and into the second half of this year and in part that is because there is uncertainty about what OPEC will be able to do or even can do in the current market," he cautioned.

"There's uncertainty over how much oil Iran can bring back (following the lifting of sanctions), how much U.S. (shale oil) production is going to fall and what's going to happen with Asian demand. There are lots of moving parts here."