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Singapore — * Imports from Russia down nearly 22% on month in June
* Independents more willing to lift heavier grades
* Saudi Arabia wins back top supplier crown in June

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Russia lost its position as China's top crude supplier in June after holding it for three consecutive months, as independent refiners in the world's second largest oil consuming nation turned to new grades to enhance diversification.

With independent refiners reducing their dependence on Russian crudes, Saudi Arabia was able to win back the top spot among crude suppliers to China.

In addition, it prompted market participants to believe that inflows from Russia were unlikely to break the 5 million mt mark in a single month again in the near future.

Article Continues below...

China's imports from Russia fell by 21.7% from record high 5.25 million in May, to 4.11 million mt in June. This was, however, up 8.6% year on year, data released Friday by the General Administration of Customs showed.

Saudi Arabia returned as the top supplier in June, with volumes rising 11.9% from May to 4.57 million mt, despite a 14.1% year-on-year decline.

Market sources said China's independent refiners were now more willing than ever to try new crudes and were more open to lifting heavier grades instead of limiting themselves to mainly lighter grades from Russia.

With crude distillation units at independent refiners designed to run heavy feedstocks, market participants see it as logical for the Shandong-based refiners to reduce their dependence on lighter crudes.

WHY RUSSIAN CRUDES HAD AN EDGE

Since Beijing gave independent refiners permission to import crude oil last July, Russia's ESPO has been the crude of choice for these refiners.

Russian grades are easier to bring in as the voyage time from the Far East Russian port of Kozmino to China is about three to four days versus 20-30 days from Persian Gulf ports.

The short voyage also makes it economically viable to import small cargoes of about 40,000-100,000 mt, rather than the regular VLCC cargoes which are typically 300,000 mt.

In Shandong, most independent refiners currently process crude grades with an API gravity in the range of 25-29 degrees.

Sokol and ESPO have API gravity of 36.4 and 34.8, respectively.

So far in July, China's independent refiners imported around 480,000 mt of Russian crudes, up 33% from 360,000 mt recorded last month, but still far below the 1.2 million mt in May, an S&P Global Platts survey showed.

The proportion of Russian grades in the total crude volume received by the Shandong-based independent refiners also dropped from 21% in May to 8% in June.

China imported a total 30.62 million mt, or 7.48 million b/d of crude of all origins in June, up 3.8% year on year but down 1.8% from May.

DOMESTIC MARKET SURPLUS

In addition to their efforts to diversify crude buying, surplus availability of lighter oil products in the domestic market also weighed on demand for light crudes from Russia.

"The yields from Russian crudes for gasoline are high, but China is flooded with gasoline now," said a market observer. "Therefore, Russian crudes are not very favorable as the independents want to change their product slate to produce less gasoline."

China exported 10% of its 11 million-mt gasoline output in June, which was the highest proportion since May 2010, indicating a serious surplus situation in the domestic market, according to Platts calculations based on official data.

SAUDI ARABIAN SUPPLIES

Meanwhile, supplies from Saudi Arabia are expected to remain stable as nearly all imports are via term contracts with state-owned refineries in China.

Only some limited barrels are shipped to the independent sector.

Over the first half of 2016, the Middle Eastern country remained the top crude supplier to China, taking 14% of the market share, despite exported volumes edging up only by 0.3% year on year to 26.45 million mt.

Russia was in the second spot in the January-June period, exporting 26.28 million mt to China, which was just 177,000 mt lower than shipments from Saudi Arabia over the period. But Russian sales were up 35% from H1 2015.

Volumes from Venezuela and Brazil surged more than 35% year on year to 9.94 million mt and 8.39 million mt, respectively, in H1 2016.

While Vietnam and Indonesia raised their supplies by 264% and 294%, respectively, to China.

As such, these four suppliers have also benefited from new demand from the independent refineries.

--Oceana Zhou, oceana.zhou@spglobal.com
--Sambit Mohanty, sambit.mohanty@spglobal.com
--Edited by Haripriya Banerjee, haripriya.banerjee@spglobal.com