In the Karamay oilfield located on the northwestern margin of Junggar basin, Xinjiang, China, a large area of the Karamay Formation is exposed at outcrop in the northeast of the oilfield, a consequence of thrusting. The Middle Triassic Karamay Formation in the outcrop area is a type of terrestrial third-order sequence, bounded by two easily recognizable sequence boundaries: a regional surface of angular unconformity (SB1) at the base and a regional unconformity (SB2) at the top. Within the Karamay Formation, two lacustrine expansion events can be recognized and be used to identify both the initial and the maximum lacustrine flooding surfaces. The two lacustrine flooding surfaces serve as references for the classification of this third-order sequence-Karamay Formation into the following three sedimentary successions: a lower lowstand systems tract (LST), a middle lacustrine-expanding systems tract (EST), and an upper highstand systems tract (HST). Different systems tracts are composed of different depositional system assemblages. In this paper, each depositional system is described in detail. The lowstand systems tract in the study area is characterized by incised valleys. At the base and on the margin of the incised valleys occur alluvial fan depositional systems, and in the upper and distal parts of the alluvial fan, low-sinuosity river depositional systems. The lacustrine-expanding systems tract consists of a lacustrine depositional system and a lacustrine delta depositional system, overlying the lower incised valley fills. The highstand systems tract is filled by a widespread lacustrine braided delta depositional system. The analysis of sequence stratigraphy in this paper serves the description of the spatial distribution of the reservoir. The depositional system analysis serves the description of the reservoir types. Field investigations of oil sandstone and oil seepage show that the Karamay Formation is composed of several types of reservoirs. However, two types of high quality reservoir occur both in the upper interval of the lowstand systems tract and in the lacustrine-expanding systems tract: gravelly low-sinuosity channel in the distal fans and sandy-gravelly distributary channel in the lacustrine delta plain.