Sinopec Shanghai lowers crude stocks to control cost impact from oil price fluctuation

Sinopec Shanghai Petrochemical has reduced its crude inventories by 100,000-150,000 mt from normal levels in an effort to control the cost impact from international crude price fluctuation, Wu Haijun, the company's chairman, said March 24.

The 14 million mt/year (280,000 b/d) Shanghai Petrochemical is Sinopec's only listed refinery, and its plans are typically representative of China's state-owned refineries.

"Wide volatility of crude prices this year have been a big challenge to the company's operation," Wu said during a conference call to discuss the company's 2021 financial results.

The plant's daily throughput is about 40,000 mt, a company source told S&P Global Commodity Insights,. which means the reduction is equivalent to about two to four days of throughput.

China's National Development and Reform Commission requires refineries to keep crude inventories at a level equal to at least 15 days of throughput when crude prices are below $130/b and at least 10 days of throughput when prices cross over the level.

Other refineries could follow Sinopec's lead, which would eventually caps China's crude imports at a time when crude prices are fluctuating at high levels. The country's crude inflows in the first two months of 2022 fell 4.9% year on year to 10.58 million b/d, data from the General Administration of Customs showed.

Shanghai Petrochemical aims to process 13.65 million mt of crude oil in 2022, down 0.8% from 13.76 million mt in 2021. The plant's throughput stood at 14.67 million mt in 2020, according to CFO Du Jun.

The lower throughput levels in 2021 and 2022 were due to scheduled maintenance. The plant shut its 6 million mt/year crude distillate unit and connected facilities last year for the works, while the 8 million mt/year CDU will undergo maintenance this year this year, Wu said.

In addition, Wu said the plant has no plan to take Russian crude or Iranian crudes yet.

In 2021 Shanghai Petrochemical received 77.3% of its crude supplies from the Middle East, down from 82.39% in 2020.

It cracked more crudes from Europe, Africa and North America, with the proportion rising by 2.6-4.2 percentage points, according to the company's 2021 report.

Oil product output to fall

Although profit margins for its petrochemical products declined in 2021 while oil product profit margins rose, Sinopec Shanghai is continuing to cut its oil product yield in 2022, according to its report.

In 2022 the company aims to produce 7.57 million mt of gasoline, gasoil and jet fuel with a combined product yield of 55% in 2022, down from 7.97 million mt in 2021 with a 58% product yield.

"Domestic gasoline demand will soon peak while gasoil demand has stopped growing," vice general manager Huang Fei said.

Meanwhile, Beijing plans to cut oil product exports by slashing gasoline, gasoil and jet fuel export quotas by 56% year on year in the first batch allocation for 2022. This may force refineries to cut output.

Shanghai Petrochemical was previously a leading gasoil exporting refinery with outflows of 150,000 mt/month, but it recently suspended sending gasoil cargo to overseas.

As a result, it has slashed its gasoil output target for 2022 by 12.6% year on year to 2.96 million mt.

At the same time, it plans to lift jet fuel production by 10.6% to 1.31 million mt.

"The target is more likely a reflection of Shanghai Petrochemical's expectation earlier in the year of a recovery in domestic aviation when COVID-19 is controlled in China," a Hong Kong-based analyst said.

"But with the current wave of the virus, added to Eastern Airlines' aviation disaster, I think jet fuel demand will continue to be under pressure."

China Eastern Airlines flight 5735 crashed in southern China Guangxi province on March 21 with no survivors.

Sinopec Shanghai's 2022 oil production target (Unit: million mt)

Sinopec Shanghai's crude sources(Unit: million mt)

Source: Sinopec Shanghai