China independents' relentless buying of Russian crude slows as sanctions near

The relentless buying spree of China's independent refiners for attractively priced Russian crudes is finally showing signs of slowing in November as importers pause for breath and wait for developments ahead of the imposition of EU sanctions, a trend that could potentially ease loading volumes for December and January.

Russian crude imports by independent refiners rose 3.9% month on month to 2.49 million mt in October and were the highest since January, but some major suppliers of Russian ESPO crudes have since started to suspend business because of the looming sanctions, market sources said.

Only two cargoes for December loading were heard to have traded in the past two weeks, compared with 24 cargoes imported in October.

The EU's ban on Russian seaborne crude oil comes into effect Dec. 5 and will be followed by a ban on Russian refined products from Feb. 5, 2023.

"Buying of ESPO cargoes, as well as other grades, has been quiet, which might indicate lower imports for December-loading cargoes," a trade source said.

Independent refineries started accelerating ESPO imports in April, purchasing around 1.9 million mt in the month, up 26.7% from March, when other buyers moved to the sidelines to gauge developments after Russia's invasion of Ukraine.

The continuous strong inflow in the past few months has pushed overall ESPO imports up 4.7% year on year to 20.5 million mt over January-October, S&P Global Commodity Insights data showed.

Strong domestic demand for gasoil has supported the Chinese independents' demand for ESPO, which is seen as an attractive feedstock for producing gasoil.

In addition to the recent decline in ESPO imports, only one cargo of Urals arrived in October, down 66.7% from 300,000 mt a month earlier. Independent refineries' Urals imports have declined since touching 1 million mt in July amid relatively high prices and tight supply.

The sanctions from Dec. 5 on seaborne Russian crudes will likely make it even more difficult for Shandong independent refineries to buy Urals barrels, sources said.

Interest in other grades

While the relatively bigger independent refining complexes process mainly crudes from the Middle East, smaller Shandong-based independent refineries typically rely on crudes from either Russia or Malaysia as their main feedstocks.

The share of feedstock imports from the two origins into Shandong, comprising crudes and bitumen blend, accounted for about 83% of the total feedstock imports in October, easing from 87.2% the month before, according to S&P Global data.

While Russian cargoes have attracted the most interest from Shandong independents in recent months, some have turned to other feedstocks, although in relatively small volumes, according to sources.

Two independent refineries were heard to have bought Brazilian grades at premiums of around $6.80-$70/b on a DES Shandong basis to ICE Brent futures for late November-early December arrival, while another was heard to have bought Merey crude at a discount of around $28/b to the same basis.

This might signal renewed interest in interest for cargoes from Angola or Brazil as trading in Russian ESPO crude wanes ahead of the sanctions, sources said.

There was a rare import of 130,000 mt of Clov crude from Angola in October, by Dongming Petrochemical.

However, this may do little to halt the gradual dip in appetite for Angolan crudes, imports of which fell 60.9% year on year to 4.2 million mt over January-October due to its relatively higher import cost.

Middle East boost

While Shandong independent refineries mostly process barrels from Russia or Malaysia, ChemChina is the only company in Shandong relying on imports from the Middle East, after it halted imports from Russia earlier this year.

Other independent refiners showing interest for Middle Eastern cargoes are the new integrated refining complexes Zhejiang Petroleum & Chemical, Hengli Petrochemical (Dalian) Refinery and Shenghong Petrochemical.

With Shenghong boosting imports since October for commissioning its greenfield 16 million mt/year refining complex in Lianyungang, combined imports from the Middle East by these four companies rose 15% month on month to 6.66 million mt in October.

Inflows from the UAE, Saudi Arabia, Iraq, Oman and Kuwait are likely to increase further in the coming months as Shenghong eyes starting operations, sources said.

In addition to Middle Eastern grades, a small 80,000 mt parcel of North West Shelf condensate was imported from Australia by ZPC in October, which took imports over January-October to 300,000 mt, up from none the year before.

However, Malaysia remained the top feedstock supplier to the independent sector, with 5.33 million mt shipped in October, up 3.3% from the month before. Over the first 10 months of the year, imports from Malaysia were up 39.1% from the same period of 2021 at 33.3 million mt and accounted for about 24.3% of the total feedstock imports by the independent sector.

Top feedstock suppliers for China's independent refiners:

(Unit: '000 MT)

Top feedstock imports for China's independent refiners:

(Unit: '000 MT)

*Including imports of other crude grades

Source: S&P Global Commodity Insights