(Sept 9): China’s private oil refiners may cut processing runs in the coming weeks as traditional sources of crude supply become scarcer and costs surge, potentially hurting demand in the biggest importer.
Teapots — as the companies are known — face a twin challenge, with shipments from both Iran and Venezuela under pressure because of a US naval blockade against Tehran’s ports and redirection of flows from the South American producer following Washington’s intervention. At the same time, crude futures have been rallying, with Brent on the crest of hitting US$100 a barrel.
“Teapots are unlikely to be able to afford a full shift to mainstream grades,” said Jianan Sun, an analyst at Energy Aspects Ltd. Their margins — which are typically narrow in the industry — have already fallen back to breakeven levels from about US$10 a barrel in early July, Sun added.
The global oil market is zeroed in on the outlook for China’s crude-import trends, as the nation has acted as a swing buyer since the outbreak of the US-Iran war in February. Although the conflict triggered an initial supply shock, Beijing scaled back buying, helping to prevent prices from rallying even harder. The flexibility was possible as the country had accumulated substantial stockpiles in prior quarters, effectively shielding refiners from the fallout.
After averaging 48.3 million tonnes a month last year, China’s oil shipments from overseas fell below 30 million tonnes in June, hitting the lowest since 2016. While they have rebounded over the past two months — increasing to 37.9 million tonnes in August — volumes remain about a quarter below year-ago levels.
Private refiners account for more than a third of China’s overall refining capacity, so their collective operating decisions carry significant weight in driving nationwide crude demand. Although the sector is diverse, spanning large integrated and conglomerate-backed plants to smaller processors, they tend to be less well-funded than state-owned rivals.
“For private Chinese refiners, there are so many uncertainties,” said Emma Li, lead China market analyst at Vortexa Ltd, noting there’s already been a rapid decline in their crude inventories in recent months.
If independent refiners continued to draw down what remains of Iranian crude in floating storage at a rate of one million barrels a day, regional offshore holdings could dry up by mid-October, Li said. Ultimately, a failure to secure supplies of feedstock would likely force run cuts from next month, Li added.
Run rates for independent refiners in Shandong — a hub for the industry — have been volatile this year. Activity at plants in the coastal province was about 55% of capacity in early September, broadly in line with figures shortly after the Iran war broke out but well up from a low near 43% in July, according to figures from consultant Mysteel OilChem.
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