China’s independent refiners have sharply reduced their processing rates to the lowest levels in nearly five years, driven by rising crude costs and a shrinking supply of Russian oil following new U.S. sanctions.
The sanctions have made it more expensive for private refiners, mainly located in Shandong province, to procure crude oil. This has led to refining margins turning negative, forcing them to cut back on production.
According to data from industry consultancy Mysteel Oilchem, independent refiners, also known as teapots, have reduced their processing capacity to just 43.64% as of this week. This is the lowest level since March 2020, when the COVID-19 pandemic first began.
The latest sanctions from the Biden administration, targeting Russian oil trade and its shadow fleet, have disrupted the supply of ESPO crude, a type of oil favored by Chinese refiners. The sanctions have targeted oil tankers, reducing the number of non-sanctioned vessels available to ship Russian crude to China.
As Russia’s top buyers in Asia – China and India – avoid using sanctioned tankers, freight rates for shipping Russian crude have surged. This has made refining Russian crude at many private refineries in Shandong province unprofitable, leading to further cuts in processing rates.
Consultancy JLC predicts that crude processing volumes could fall even further this month.
Many of the specialized tankers used to transport Russian oil from Arctic and Far East fields to Asia have now been sanctioned. Russia has started to reassign tankers to prioritize shipments to China. Aframax tankers, which previously serviced crude exports from Russia’s western ports, are now being redirected to the Far East-China route to carry ESPO crude, according to Bloomberg, citing shipbroker and ship-tracking data.
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