China's private refiners reassess supply risks of Iranian crude, hesitant to increase purchases

China's independent refineries are re-evaluating the risks of purchasing Iranian crude oil amid the escalation of Israel's attacks on Iran, which could trigger further US sanctions on Iranian crude trading, refinery, and trade sources told Platts, part of S&P Global Commodities Insights, June 16.

However, these refineries do not appear to be in a rush to stock up now, given the generally weak demand for oil products, poor refining margins, and limited remaining crude import quotas.

"The supply of Iranian crude will likely be impacted due to the recent tensions, but the situation is changing rapidly, and we will continue to monitor and assess it," said an independent refinery source in Dongying, Shandong.

The source added that feedstock demand remains low because of reduced utilization rates, which are attributed to weak refining margins and the limited crude import quotas available.

"So, we're not in a rush to purchase more for the time being," the Dongying-based refinery source said.

Due to unfavorable margins, another independent refinery in Dongying, capable of processing approximately 20,000 mt of crude daily, is currently operating at around 10,000 mt daily.

Data from local energy information provider JLC indicated that the average utilization rate at China's Shandong independent refineries fell to 48.18% as of June 11, down 0.97 percentage points from the previous week. Meanwhile, refining margins fell Yuan 24/mt to Yuan 266/mt during the same period, according to JLC data.

Iranian Light crude was offered at a discount of approximately $3/b against ICE Brent Futures on a DES Shandong basis as of June 16, a decrease from the earlier discount of $2.5-$3/b at the beginning of June, according to market sources.

"We haven't observed any changes in the market fundamentals for Iranian crude," said another refinery source.

Lower demand for Iranian crudes

Prior to this, independent refineries have been reducing their purchases of Iranian crude in recent months. Their combined imports of Iranian crude fell to 1.25 million b/d in May, according to data from Platts June 4.

This volume represents a 27.3% decline from imports of 1.72 million b/d (7.04 million mt) in April, and it has declined further from a record high of 1.91 million b/d (8.07 million mt) in March, as per Platts data.

Only about a dozen independent refineries are currently purchasing Iranian crudes, while an additional 5-6 refineries have been gradually scaling back their procurement, opting instead for Russian crudes or other regular sources such as those from West Africa, America, or the Middle East.

In May, a Dongying-based independent refiner imported approximately 135,000 mt of Murban, with a second similar cargo expected to arrive in early June, according to refinery sources.

On the other hand, a third refinery source stated, "If a new round of sanctions targeting independent refineries that buy Iranian crudes is imposed by the US, the buying interest from these refineries for such cargoes could be further impacted."

Domestic fuel prices jump

Reflecting the recent surge in international benchmark crude prices, domestic retail gasoline prices have increased by about Yuan 350/mt over the weekend, while gasoil prices surged by around Yuan 400/mt during the same period, according to refinery sources.

Crude oil futures climbed in midmorning Asian trade June 16, as ongoing strikes between Iran and Israel for the fourth day fueled concerns of escalating geopolitical tensions in a region that supplies roughly a third of the world's oil. At 11:02 am Singapore time (0302 GMT), the ICE August Brent futures contract was up 74 cents/b (1%) from the previous close at $74.97/b, while the NYMEX July light sweet crude contract was up 91 cents/b (1.25%) from the previous close at $73.89/b.

"The refining margins might improve a bit for a few days, but we're not sure how long this will persist, given that the demand for oil products has peaked and is falling year over year," said the third refinery source.

However, sales of these products remain weak, as demand for gasoil has slightly faded with the wheat harvest season nearly complete across much of China. Additionally, gasoline demand continues to be displaced by the rapid adoption of new energy vehicles, according to refinery sources.