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Singapore — Far East Russian crude oil is likely to bear the brunt of China's economic slowdown aggravated by the coronavirus outbreak, with both state-run and private Chinese refiners poised to cut imports of their favorite feedstock ESPO Blend crude amid faltering refinery throughput.

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China's Sinopec would have to cut spot crude purchases as domestic oil demand has drastically dropped with industrial, manufacturing and construction activities coming to a halt, said a senior trading manager at the state-run refiner.

Sinopec, the world's biggest refiner by capacity, recently slashed overall crude throughput by about 13% and its refineries across China is currently operating at minimum run rates in February, industry and company sources with close knowledge of the matter told S&P Global Platts Monday.

Throughput levels for another state-owned refiner PetroChina also saw sharp declines in the recent week.

"PetroChina will adjust crude import plan amid high inventory," a feedstock trader at the state-run refiner said.

Independent refiners in Shandong province have also reduced their average run rate by more than 17 percentage points from mid-January, refinery sources and local traders with directly knowledge of the matter said.

"Independent refineries got hit the hardest this time around, with their utilization rates slashed and operations shut down for some," said Kang Wu, head of S&P Global Platts Analytics Asia.

Among various light, medium and heavy crude grades that typically make up China's monthly crude import basket, Far East Russian ESPO Blend crude appears most vulnerable to faltering Chinese demand as the medium sweet grade served as the country's number one feedstock choice in the spot market over the past several years.

The Shandong-based independent refineries, for one, took 22.29 million mt of ESPO crude in 2019, making the Russian grade the sector's most favored feedstock last year, S&P Global Platts data showed.

ESPO crude spot differentials

Platts assessed first-month ESPO Blend crude at a premium of $5/b against Platts Dubai Friday last week, marking the lowest price differential since $4.5/b on July 19, 2019.

The spread between ESPO blend crude on a CFR North Asia basis and second-month Dubai swap plunged from a premium of more than $9.3/b in late-December to a premium of $6.04/b Monday.

"ESPO is now pricing in substantial concerns about oil demand destruction and consequently steep crude run cuts in China, due to the coronavirus epidemic," JY Lim, oil markets adviser at Platts Analytics, said.

All these throughput cuts would lead to around 1.8-2 million b/d of crude oil import reduction, analysts said.

"It is difficult to say if there would be additional cuts ... it depends on when the coronavirus would be controlled and when the number of confirmed cases would reach the peak," a Beijing-based oil market analyst said.

China imported 10.16 million b/d of crude in 2019, up 9.5% year on year, data from General Administration of Customs showed.


However, state-run refiners said they would fully respect their term purchase contracts for 2020, providing much needed relief to several OPEC producers in the Middle East.

Sinopec will stick to its term supply obligation, though the monthly intake could be at the lower-end of the contractual operational tolerance range, the company trading manager said.

Saudi Arabia, for one, appears likely to maintain its status as China's top crude oil supplier as the OPEC Kingpin supplies crude to Asia mostly, if not all, through term contracts.

China's crude imports from Saudi Arabia hit 1.67 million b/d in 2019, up 46.9% from 2018 as the kingdom secured new customers through term contract.

A Beijing-based analyst said the Chinese refining giants' trading profiles would also help them to divert some fixed spot cargo to other destination as a respond to shrinking demand from the world's biggest oil importer.

PetroChina frequently resells some destination-free spot crude cargoes, including Far East Russian ESPO and Sokol grades, to buyers in other North Asian neighbors, company sources previously told Platts.

Its subsidiary PetroChina International has marketing and trading offices in Seoul and Tokyo.