China's small independent refineries expect the government to raise the fuel oil import allowance for 2023 to allow them to bring in more barrels as an alternative feedstock for the remainder of the year, refining sources told S&P Global Commodity Insights Nov. 14.
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There has been widespread talk that the government would likely raise the 2023 fuel oil import allowance by 3 million mt for non-state-owned enterprises as the quotas are running out under the annual limit of 16.2 million mt set at the beginning of the year.
The annual limits have been kept stable for several years as the fuel oil quotas were more than sufficient either due to slow refining demand or abundant crude oil imports.
Unlike quotas for importing crude oil or exporting oil products, which are allocated to each oil firm, refineries or oil companies are required to apply for the fuel quota cargo by cargo until the annual limit is reached, in a first-come-first-served manner.
But this year, due to the combination of competitive prices of Russian fuel oil, strong refining margins in the first half of the year and tight crude import quota availability, small independent refineries had almost used up the 16.2 million mt fuel oil import quotas as of the end of October, according the refining sources.
China imported 17.38 million mt of fuel oil in the first nine months of 2023, more than double the 7.65 million mt in the same period last year, according to customs data. The imports include barrels saved in bonded warehouses, which do not consume fuel oil import quotas.
Some small independent refineries have paid about Yuan 10/mt ($1.37/mt) to procure imported fuel oil via state-run trading houses by using their import quotas for state-run enterprises, the sources said.
"The shortage of fuel oil quotas has not had much impact on the volume of fuel oil, but the cost is higher," a source at a Dongying-based independent refinery said.
A Shandong-based analyst said: "Some independent refineries will likely take this chance to import a few more cargoes of fuel oil, but the supply seems to be a bit tight, capping imports."
The Dongying-based refinery source said the import cost of Russian M100 fuel oil was "slightly lower than the cost of some crudes, making it attractive as a feedstock."
A trade sources said fuel oil had become "a bit economic as the price basis of MOPS has come off more than that of ICE Brent, which made it possible for independent refineries to replenish the barrels as a feedstock."
Russian M100 fuel oil was offered at a premium of around $70-$75/mt against the MOPS 380 CST HSFO assessment, which was up from deals done at around $65-$70/mt last week, sources said.
Some trading sources also said the tight crude import quota availability was the main reason behind the growing appetite of independent refineries for imported fuel oil, sources said.
"Some independent refineries already cut throughput as they were short of crude feedstock on top of the weak refining margins, so they need the barrels," a source said.
The latest data from local energy information provider JLC showed the utilization rate at Shandong independent refineries as of Nov. 8 was down by 2.34 percentage points week on week at 63.16%.