The Middle Permian Tarlong Formation (P2t) source rocks in the Turpan-Hami Basin were studied based on multiple geochemical analyses on outcrop samples from the basin edges to reveal the hydrocarbon-generating potential, depositional environments, and organic composition. Due to long-term exposure to the surface, some outcrop source rock samples suffered weathering and displayed abnormally low S1 + S2, hydrogen indices, and H/C atomic ratios, and abnormally high Tmax and Ro values. Hopane and sterane biomarkers in these samples were almost unaffected by weathering and likely reflect real and unaltered values. After eliminating the effects of weathering, the P2t source rocks in the Turpan-Hami Basin were found to exhibit high hydrocarbon-generating potential and are dominated by good to excellent source rocks and by type II kerogens. The P2t source rocks in the Turpan-Hami Basin display low to medium pristane/phytane (Pr/Ph, <2.0), gammacerane/αβ C30 hopane, and C27 diasteranes/C27 steranes ratios; low C19 tricyclic terpane/C23 tricyclic terpane (<0.5) and C24 tetracyclic terpane/C26 tricyclic terpane (<2.0) ratios; medium 4-methylsteranes/ΣC29 sterane ratios; and high sterane/hopane ratios. These source rocks were deposited in a “balance-filled-lake” with minor or no terrestrial organic matter, significant algal input, especially freshwater to brackish water microalgae and acritarch organic matter input, and weakly alkaline, anoxic to suboxic brackish water.