China crude importers concerned with pandemic resurgence, Russian flows

China's crude imports for May and June loadings may remain subdued as refiners struggle with declining demand following the pandemic resurgence at home, while the ongoing Russia-Ukraine war prompts importers to move cautiously in sealing deals on Russian cargoes.

China's crude imports from Russia will be capped in March despite a slight recovery, and inflows will remain under pressure in Q2 as independent refiners adopt a cautious stance amid shrinking refining margins, analysts said. This will extend the trend seen in February when inflows dropped to a nine-month low of 1.42 million b/d.

Adding an extra layer of uncertainty for crude imports, not just from Russia but from all origins, will be COVID-19 lockdowns in China that could have importers worrying about slowing oil products demand.

"The outbreak of the omicron variant and elevated restrictions on movement in China will hit oil demand in March and April," said Kang Wu, head of global demand and Asia analytics at S&P Global Commodity Insights.

"Rising oil prices is another factor that will potentially constrain China's oil demand growth, although the country has a price mechanism in place to limit the increase of pump prices when they reach certain levels at times like these. As such, the dampening effect of high oil prices is not as severe as that of COVID-19 restrictions."

China could potentially see oil demand destruction of up to 650,000 b/d and 400,000 b/d, respectively, in March and April, S&P Global said.

"Chinese buyers need to consider the COVID-19 situation in the coming months when buying crudes in overseas." a Beijing-based analyst said. "The current wave of COVID lockdowns have dampened oil products demand."

Inflows from Russia

General Administration of Customs data shows February inflows from Russia were 26.1% lower year on year and down more than 25% month on month. Russian volumes were last lower at 1.29 million b/d in May 2021.

"It's a kind of gambling to take Russian cargo now as it is possible to lose the whole cargo anytime as the there is no conclusion about the sanctions on Russia yet, while refining margin are not good," a Shandong-based refiner said.

Independent refineries in February slashed Russian crude imports by 37.3% from January, or 43% year on year, to 1.58 million mt, S&P Global data showed.

Independent refineries in Shandong province had reduced their throughput to a 23-month low of 2.1 million b/d, down 5.3% month on month and 20.7% lower year on year, on narrowing margins and the government's requirement to cap refining utilization rates during the Beijing Olympics.

This contributed to China's crude imports from Russia falling 9.1% year on year to 12.67 million mt, or 1.6 million b/d, over January-February. The decline in Russian crude inflows was much higher than the 4.9% year-on-year reduction in China's total crude imports during the same period.

However, a few analysts say Russian crude imports could recover in March as refineries prepare to boost crude runs after the Lunar New Year and Winter Olympics.

Seaborne Russian crude imports might rise 13.5% month on month to 859,000 b/d in March, Kpler shipping data showed. China imports Russian crude both via the seaborne route and pipeline.

The pipeline supplies to PetroChina are fixed by contracts and are expected to remain stable; however, the seaborne volume is expected to fall in April and May as the start of the war in late February raised doubts on shipments and payment mechanisms.

Saudi Arabia, Iran

Saudi Arabia delivered 14.61 million mt, or 1.76 million b/d, of crude to China during the first two months of the year, taking the top spot ahead of Russia. The top OPEC supplier is expected to maintain that position in the foreseeable future amid efforts to strengthen energy ties with Asia's top oil consumer.

Saudi Aramco has resumed discussions with China's Norinco for a 300,000 b/d refining venture in Liaoning province, and has also started a study with Sinopec to add a new ethylene plant at their joint venture project Fujian Refining & Petrochemical in Fujian province, S&P Global reported.

China's Iranian crude inflows in January were at 259,937 mt, or 61,463 b/d, according to the country's official data.

Iranian crude cargoes were likely stored in strategic petroleum reserves by Sinopec in Zhanjiang city, southern Guangdong province, according to Kpler shipping data.

S&P Global data showed around 4.12 million mt of Iranian crudes were imported, marked as crude from other origins, into China's Shandong province in the first two months of the year. Most of those cargoes imported by independent refineries were shown as cargoes originating from Oman or the UAE, in addition to Malaysian blended grades.

As a result, supplies from the Middle East rose 8.5% on the year to 5.9 million b/d over January-February, and the region's market share jumped to 55.8% from 48.9%.