China's independent refiners turn to Middle East crude as discounts widen

China's independent refiners have stepped up purchases of Gulf crude over Iranian barrels, as widening discounts and improved supply availability strengthen the economics of Middle Eastern grades, refinery sources and oil traders told Platts, part of S&P Global Energy, July 8.

With the Strait of Hormuz remaining passable and more Middle Eastern crude able to flow into Asian markets, independent refiners have returned to the market for grades such as Basrah Heavy, Al-Shaheen, Upper Zakum and Basrah Medium, Shandong-based independent refinery sources said.

"A few deals were heard done during the past few days, with more showing interest in inquiring for the cargoes," a Shandong-based trader said.

At least four independent refineries have purchased Middle Eastern crude cargoes in recent days, largely due to their comparatively lower prices, three oil traders based in Shandong said.

Two separate Chinese independent refiners purchased one VLCC each of Basrah Heavy and Al-Shaheen, while a third refiner bought parcels of Upper Zakum and Basrah Medium. The cargoes are expected to arrive in China over July-August, according to Shandong-based oil traders.

Price levels for Upper Zakum and Al-Shaheen were at discounts of around $7-$8/b to ICE Brent crude futures, DES, as of early July 8, widening from discounts of around $5/b for cargoes concluded late last week, according to the traders.

"Supply seems to be overwhelming, with prices falling further," one of the traders said.

Iranian Light remains firm

In contrast, independent refiners showed limited interest in Iranian crude, with offers remaining comparatively firm despite weaker demand, according to an independent refinery source in Dongying.

Iranian Light was offered at a discount of around $2-$3/b to ICE Brent crude futures on a DES Shandong basis, largely stable from the previous week, according to a Shandong-based oil analyst.

"Suppliers were insisting on the above offers, due mainly to the relatively short supply, but independent refiners were not interested," the analyst said.

This comes as the US Treasury Department on July 7 revoked its authorization of Iranian oil sales after a series of attacks on tankers in the Strait of Hormuz this week.

"We haven't heard any change on the offers for Iranian crudes yet as of early July 8," said another trader in Shandong.

Russian ESPO, another favored grade among China's independent refiners, also moved lower. August-loading ESPO cargoes were at discounts of around $4-$5/b to ICE Brent crude futures, compared with discounts of around $2-$3/b at the end of June, according to the trader.

Independent refiners' combined imports of Russian crude totaled 3.8 million mt (930,000 b/d) in June, slightly above Iranian crude imports of 3.636 million mt (888,396 b/d), Platts data showed.

Iranian crude imports fall

China's independent refineries imported a combined 3.636 million mt (or 888,396 b/d) of Iranian crude in June, down 41.4% from May, Platts data showed.

The June volume marked a 17-month low and was down 47.1% from a year earlier, according to Platts historical data.

The decline was also linked to lower operating rates in Shandong, where independent refiners have been under pressure from persistent refining losses, according to local energy information provider JLC.

Data from JLC showed the average utilization rate at Shandong independent refineries fell 2.38 percentage points month over month to 50.76% in June.

Run rates are expected to remain under pressure in July, with three independent refineries, having a combined capacity of 290,000 b/d, scheduled to shut for maintenance during the month. This follows around 786,000 b/d of capacity from five independent refineries that were taken offline in June, according to OilChem data.