Analysis: Low crude prices lure China's independent refineries to buy some Q2 delivery cargoes

Low crude prices are encouraging China's independent refineries to return to the international market for April/May delivery after a significant cut in throughput amid the coronavirus, or COVID-19 outbreak, but demand revival remains a key factor, market sources said this week.

"Crude prices are too low and very attractive when betting oil consumption would rebound in two months," a Dongying-based independent refiner said.

The most popular grades Russian ESPO and Brazilian Lula were offered at premiums of only $2.1-$2.3/b and around $2/b against ICE Brent on Tuesday, respectively, for April or May deliveries, almost at half the premium for March delivery.

Hengyuan Petrochemical has recently booked a cargo of Lula for May delivery, at a premium of $2.2/b to ICE Brent futures on a DES basis.

"We hope the coronavirus will stop spread[ing] in May, so we need to prepare feedstocks," said the source with Hengyuan.

Meanwhile, a Liaoning-based independent refinery also booked a cargo of Sokol crude at a premium of around $4/b against Platts Dubai, for April delivery, according to trade sources.

Elsewhere, Xintai Petrochemical has bought two cargoes of ESPO crude at around $2.3-$2.5/b on a DES Shandong basis for April delivery.

A few other refineries including Luqing Petrochemical, Jincheng Petrochemical, Wonfull Petrochemical, were heard to have started to book cargoes late last week.

Meanwhile, the market structure was also attractive for taking April/May deliveries if there is storage available, sources said.

"Even a slight backwardation in ICE Brent futures will encourage buying," the Dongying-based source said.

The spread between front-month and second-month ICE Brent crude futures contracts tumbled to minus 19 cents/b at 0830 GMT close of Platts Singapore Market on Close assessment process on February 4, marking the first time the price structure flipped to contango since March 6, 2019.

However, the spread was pegged at 17 cents/b at the end of Platts Singapore MOC Tuesday, significantly lower than the average of 79 cents/b in January.

Hongrun Petrochemical, which owned a 12 million cu meters crude storage farm in Weifang city, was heard to have taken a cargo of Mandji at ICE Brent minus $1/b on DES basis.

Refinery run rates

Some operating independent refineries are looking for feedstock as they have lifted their operation rate slightly, suggesting utilization of the sector likely have bottomed out.

More than 12 independent refineries and three ChemChina refineries in Shandong have shut while most of the others cut throughput since early February, resulting in an average utilization rate drop to 35%-36% from 63.5% in January.

"We have raised the crude throughputs to normal level, so we need to replenish stocks," said a source with Luqing Petrochemical.

The refinery has booked a cargo of ESPO crude for April delivery at a premium of below $3/b plus ICE Brent futures, for L/C of 90 days, on a DES Shandong basis last week.

Haike Petrochemical has lifted throughput by about 10% recently, while Fuhai Petrochemical, Yatong Petrochemical are also raising run rates.

Long way to demand recovery

However, more surveyed independent refiners said they would adopt a wait-and-see approach as oil product consumption was unlikely to rebound sharply at least in the near term.

"The current price level is in a comfort zone for many refineries, and we do see buying interest emerge recently, but only few turned into a deal due to demand uncertainty," said a source with a western trading company.

"Demand will recover only gradually when the government removes the transportation and production restrictions step by step," a Beijing-based analyst said, adding this will happen when coronavirus is controlled.

S&P Global Platts Analytics expects China's apparent oil demand would not see a year-on-year growth until June, with a deepest year-on-year decline in February at 9.6% and narrowed gradually to 0.8% in May.