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China independent refiners slash crude runs as high oil prices squeeze margins

Highlights

Oil price rise above $80/b to severely squeeze domestic margins

Two independent refineries shut one CDU each to cut losses

Few crude spot deals as traders cautious over outright crude prices

China's independent refiners are poised to slash their run rates as rising outright oil prices continue to threaten the fuel producers' domestic refining and sales margins, setting the stage for a sharp decline in the sector's crude imports in September, market and industry sources said.

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Crude throughputs at China's independent refineries in eastern Shandong province in June had recovered by 8.2% month on month from a 14-month low in May. In June, the independent refineries cracked 2.57 million b/d, or 10.52 million mt, of feedstocks as 13.8 million mt/year refining capacity resumed operation from maintenance in late May and early June, according to data from JLC, a local energy information provider.

However, the recovery seems short-lived as domestic margins for independent refineries in eastern Shandong province have narrowed sharply in recent weeks due to the international benchmark crude price rally. The private-sector refiners cannot fully transfer the cost burden to consumers as the government and authorities would typically cap retail fuel prices in an effort to contain inflation, industry officials and sources with knowledge of the matter told S&P Global Platts.

According to China's pricing mechanism, the retail gasoline and gasoil price ceilings will reflect very narrow or possibly even negative margins when international crude prices surpass $80/b, compared with profit levels when crude prices are between $40/b and $80/b.

ICE Brent crossed $70/b on June 1 and has been hovering over that mark. S&P Global Platts Analytics expects Dated Brent prices to average around $77/b in July before easing toward $66/b by the end of the year.

Reflecting the low margins, two independent refineries have already slashed their crude throughputs in an effort to cut losses. Haihua Petrochemical and a Binzhou-based independent refinery, have shut one CDU each last week, taking off a total capacity of around 5.7 million mt/year.

As a result, the weekly average run rate at the 43 private sector refineries has dropped to around 69.3% on July 14, a drop from the average of around 70.8% two weeks earlier, according to JLC.

The private refining sector's crude throughputs are likely to fall further as another two refineries -- Fuhai Group and Haike Ruilin Petrochemical -- plan to undergo maintenance.

Few September deals

Asia's crude trading cycle for September-loading cargoes has already passed the halfway mark, but bids from China's independent refineries remained thin this week, with few crude deals heard done in the market, according to sweet and sour crude traders based in Singapore, Beijing, Hong Kong and Shandong province.

Very few independent refineries have interest in purchasing September cargoes, as some are still slow to wrap up their August deals, said an independent refinery source in Shandong.

Offers for September delivery Tupi crude cargoes from Brazil, were seen at around a premium of $1.8-$1.9/b to the ICE Brent futures, down by about 20 cents from earlier in the week, according to the trading sources.

Despite the improved offer, hardly any Tupi crude spot deals were concluded this week as private sector refiners continued to fret over the rising outright crude prices, the sources added.

Among some of the August delivery deals concluded in recent weeks, one Zibo-based and one Dongying-based independent refiners were said to have bought a Far East Russian ESPO Blend crude cargo each, at a premium of around $2/b against the ICE Brent futures for August delivery.

An unidentified independent refiner was also reported to have bought a Norwegian Johan Sverdrup cargo for August delivery at a premium of around $1.6/b to ICE Brent futures.

Excess oil product stocks

Meanwhile, private sector refiners have been accumulating excess middle distillate stocks due to the slow sales of gasoil, with high oil prices hurting consumer sentiment across China and rest of Asia in recent months.

Gasoil stockpiles at independent refineries, including those in Shandong province, jumped to around 1.61 million mt, up by 5% week on week as of July 8, according to JLC data.

State-owned refineries have exported less oil products in July and kept large volumes within the domestic market. This has led to an increased competition and put pressure on domestic sales for the private sector refiners, said a second source with another independent refinery.