- Refining margin squeezed as crude soars above $130/b.
- Beijing is keen to maintain a strategic partnership with Russia.
- China is likely to export less oil products to ensure local supplies.
China’s crude imports in April-June are likely to remain at low levels as surging oil prices dent consumer demand and strain overall refining margins, with domestic private sector refiners struggling to make spot Russian crude purchases as sanctions start to have an impact, says an article published in SP Global.
Dampening buying interest
“Uncertainties have left independent refineries hesitating to conclude Russian crude deals for April delivery due to difficulties to get letter of credit from banks, while the crude price spike will narrow Chinese refineries’ margin, dampening everyone’s buying interest,” a Beijing-based analyst said.
China’s crude imports in January-February fell 4.9% year on year to 10.58 million b/d, or 85.14 million mt, data from the General Administration of Customs showed on March 7, as throughput was capped in February during the Beijing Winter Olympics.
Volatility adding uncertainty
Crude imports in March will likely see a modest rise from January-February, as the impact of Russia’s invasion was felt only later, but the volume would drop in Q2, especially May and June, traders and analysts said.
Amid increasing restrictions to check Russia, some local banks in China have already halted issuing letters of credit for buying Russian oil. Crude price volatility is also adding to the uncertainty, they said.
Crude at its highest
Crude oil futures jumped in mid-morning Asian trade March 7, with ICE front-month Brent rallying $21.02 to $139.13/b and NYMEX front-month crude reaching its highest levels since 2008 to $130.5/b, like the US, EU considers a ban on Russian oil imports.
Under China’s current oil product pricing mechanism, Beijing sets retail gasoline and Gasoil ceiling retail prices every 10 working days in line with international crude prices, when they are in a range of $40-$130/b.
If crude prices rise above $130/b, the government keeps the oil product retail price ceiling stable with less upward adjustment in order to control inflation.
This means refineries’ margin will be narrower as crude price rise above $130/b unless the government provide subsidy or cut taxes.
“International crude prices are more likely to stay at high levels for at least for a few weeks, as we can’t [expect] the war to end soon while additional supplies from Iran or Venezuela will take months to return,” the Beijing-based analyst said.
Retain partnership despite criticism
As of March 7, at least three independent refineries with a combined capacity of 187,000 b/d in Shandong had cut their crude throughputs due to weakening margins, according to market sources.
“Although Russian crudes are cheaper and Chinese government sounds supporting trades with Russia, the cost for independent refineries to buy Russian crude remains higher than it used to be, and shipping and payment risks remain,” a Shandong-based refiner said.
China’s Foreign Minister Wang Yi said on March 7 during the country’s legislative session that China will retain its strategic partnership with Russia despite the international community’s response to the Russia-Ukraine crisis.
Cap on oil product exports
In order to stymie inflation, China is expected to cap oil product exports to ensure domestic supplies in the coming month when refineries are likely to cut throughput because of narrowing margins, analysts said.
In January-February, the country’s oil product exports volume slumped 33% year on year to 7.3 million mt as the government slashed gasoline, gasoil, and jet fuel export quotas by 56% year on year in the first batch allocation for 2022, while lifting fuel oil quota by 30%, GAC data showed.
Drop-in production
Oil product imports, however, rose 17% year on year to 4.64 million mt. This led China’s net oil product exports to drop 62%, to 2.65 million mt.
In March, China’s oil companies are likely to slightly adjust their gasoline, gasoil export targets upward as export margins have surged in the last few days, making overseas shipments attractive, S&P Global Commodity Insights reported.
But the volume is expected to be capped due to limited quota availability and logistical bottlenecks, a Singapore-based analyst said.
The government will likely also enforce tighter controls over exports to ensure domestic supply amid high oil prices, the analyst added.
China’s policy stance
Meanwhile, as oil prices soar, China is targeting to achieve multiple objectives amid various hurdles — boosting domestic output, increasing energy reserves, stabilizing domestic prices to sustain people’s livelihood — Lian Weiliang, vice director of National Development and Reform Commission, said on March 7 during the legislative session.
Despite lifting its domestic production by 2.7% on year to 4 million b/d in 2021, China still relies on imports for over 70% of its crude supplies.
Lian added that the majority of China’s crude and gas imports are fixed by term supply contracts, helping the country to ensure supplies while also paying heed to its commitment to sustainable energy.
Prime Minister Li Keqiang said on March 4 that, the country’s CPI target is set. China’s National Bureau of Statistics on Feb. 16 released the country’s CPI, noting that in January, it had edged up 0.4% month on month and 0.9% year on year.
So, China could have some room for a potential retail oil products price increase, even if the Russia-Ukraine crisis lingers, sources said.
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Source: SP Global
