Rising Oil Prices Threaten China's Independent Refiners
Key Takeaways
- •Independent Chinese refiners have thinner margins than state-owned companies and are more exposed to higher crude costs.
- •Teapot refining margins declined to breakeven from approximately $10 per barrel in early July.
- •China imported 8.93 million barrels of crude per day in August, up 6.2% from July but down 23.4% year over year.
- •Venezuelan and Iranian crude supplies have largely disappeared, increasing Chinese refiners’ reliance on Russian oil.
- •Further teapot run cuts could intensify pressure on global fuel supplies as Middle East fighting pushes oil prices higher.
China's independent refiners may soon begin scaling back their processing rates as international crude prices climb and supply from major exporters such as Venezuela and Iran dries up as a result of U.S. foreign policy decisions.
"Teapots are unlikely to be able to afford a full shift to mainstream grades," an Energy Aspects analyst said this week, as quoted by Bloomberg. The so-called teapots are more sensitive to adverse changes in the oil market because their refining margins are thinner than those of the state-owned majors. Analyst Jianan Sun noted those margins have already fallen to breakeven, down from around $10 per barrel in early July. Where those margins go from breakeven is likely to shape how sharply teapot processing rates are ultimately cut.
The squeeze comes even as China's overall crude purchases recover. Official Chinese customs data released on Tuesday showed the country imported 37.93 million tons of crude oil in August, or 8.93 million barrels per day, a 6.2% increase from July and a further rebound from the decade low hit in June. The August import level was still 23.4% below the same month last year, but it marks a marked improvement from the June lows of just 7.1 million bpd. The next rounds of customs figures will show whether that rebound can hold while feedstock costs climb.
China slashed its total crude imports to a decade low in June, capping three months of very low buying amid high prices and constrained supply from the Middle East. That weighed on refinery output, which in turn contributed to the global fuel squeeze now set to deepen and extend in time as fighting in the Middle East continues and intensifies, pushing oil prices higher and sapping some refiners' appetite for the commodity. Further run cuts at the teapots would add to that pressure on fuel supply.
With Venezuelan and Iranian crude all but gone, Chinese refiners will probably lean more heavily on Russian crude in the coming weeks. However, Russian crude prices are also rising on the futures market, in line with all other internationally traded blends, which is likely to put a lid on demand. How much Russian crude Chinese buyers actually take, and what they pay for it relative to mainstream grades, will be a key gauge of the teapots' ability to keep their units running.
By Irina Slav for Oilprice.com
Source: OilPrice.com
