Chinese private refiners hesitant to purchase Iranian crude amid rising tensions

China's independent refineries are generally hesitant to increase their stock of Iranian crude cargoes, even as suppliers attempt to raise prices due to potential supply disruptions triggered by Iran's threats to close the Strait of Hormuz amid escalating conflicts with Israel, refinery analysts, and trade sources told Platts, part of S&P Global Commodity Insights, on June 23.

Independent refineries are primarily concerned about the potential closure of the Strait of Hormuz, as it would significantly impact the continuity of Iranian crude supplies.

However, a source from an independent refinery in Shandong stated, "the chances of Iran closing the Strait seem minimal, as that would mean opposing all other nations."

"We believe the chance is not high, so we will not stock up in preparation," a second independent refinery source said.

On the contrary, prices for Iranian crude cargoes have increased over the past week following the escalation between Iran and Israel. Offers for Iranian Light climbed to a discount of $2-$2.5/b against ICE Brent Futures on a DES Shandong basis for cargoes to be delivered in late July/August, according to market sources. This is an increase from a discount of around $2.5-$3/b a week earlier.

Sources attributed rising prices to concerns about supply disruptions amid the ongoing conflicts, along with increasing insurance and freight costs from the Arab Gulf to China. The transportation cost of moving crude from the Persian Gulf to China on VLCC was $17.7/mt on June 20, reflecting a 66.67% increase from $10.62/mt on June 13, prior to the conflict, according to Platts data.

No rush to stock up

Despite the higher offers for Iranian crude cargoes, independent refiners seem in no hurry to make purchases, as they believe the conflict will not be prolonged, sources said.

Prior to the conflict, the market generally viewed crude supply as adequate in relation to demand, due to increased output from both OPEC and non-OPEC nations.

Additionally, a refinery source in Shandong noted, "The cost of holding future cargoes is also high and may not be worth the risk."

Given the backwardation structure of the market, independent refiners are reluctant to purchase future cargoes right now, fearing that prices may soon fall, according to a Beijing-based analyst.

Meanwhile, stocks of Iranian crude, including those in floating storage near Malaysia and Singapore, as well as tankers waiting to be discharged near Chinese ports, totaled 30.8 million barrels as of June 23, up 31.3% from 23.5 million barrels on June 15, according to data from Kpler.

In May, China's independent refiners imported 5.3 million mt (1.25 million b/d) of Iranian crude, a 27.3% decrease from April's imports of 1.72 million b/d (7.04 million mt) and down from a record high of 1.91 million b/d (8.07 million mt) in March, according to Platts data.

Low utilization rate

Feedstock consumption at independent refineries remains relatively low due to the current utilization rate, sources said.

Data from JLC indicated that the average utilization rate at China's Shandong independent refineries was 48.92% as of June 18, an increase of 0.74 percentage points from the previous week. Meanwhile, refining margins for cracking imported crude narrowed by Yuan 164/mt to Yuan 102/mt as of June 18.

"We're not willing to purchase those crudes given the weak refining margins and low utilization rate," said another refinery source.

Other feedstock options

Independent refiners are likely to continue favoring Iranian crudes as their primary feedstock due to their competitive prices, sources said. However, considering the higher risks associated with Iranian crude, there may be a growing interest in purchasing Russian and Venezuelan crudes, which present relatively lower risks concerning supply stability and sanctions, according to trade sources.

Russian ESPO crudes for July delivery traded at around $2/b against ICE Brent Futures on a delivered basis, remaining largely stable from the previous week. Sources noted that cargoes for July delivery were nearly sold out.

Meanwhile, Russian Sokol crude was heard trading at $1.5-1.7/b on the same basis.

Venezuelan Merey crudes were sold at a discount of around $6/b on the same basis, with independent refineries utilizing them not only as feedstock for asphalt production but also to lower their overall feedstock costs.

Approximately seven VLCCs of Merey crudes are expected to arrive in China in July, with about five to six more expected in August, according to sources.

"The price of Merey is relatively cheaper compared to other grades, so demand remains strong," said a third refinery source.