China is laying the groundwork to take an ever increasing share of steeply discounted Russian crude oil in a move that could, in theory at least, free up supplies from other countries and boost the supply of refined fuels.
The world’s biggest crude importer bought record volumes from Russia in May, and vessel-tracking and port data compiled by Refinitiv Oil Research suggests an increase in June.
Official data showed imports from Russia at 1.98 million barrels per day (bpd) in May, a figure that includes seaborne shipments as well as flows on the East Siberia Pacific Ocean pipeline.
China’s imports from Russia are estimated by Refinitiv at 2.01 million (bpd) in June, while those from previous top supplier Saudi Arabia are tipped to drop to 1.44 million bpd from 1.85 million bpd in May.
Refinitiv also expects China’s overall crude imports to weaken in June to just 9.61 million bpd, down from 10.84 million bpd in May, amid lower refinery run rates because of soft demand caused by lockdowns in major centres to combat COVID-19.
This means that Russia’s share of China’s total imports is set to rise to 20.9% in June, from 18.4% in May, while Saudi Arabia’s will slip to 15% from 17.1% in May.
Russian crude is being sold at discounts to global benchmarks such as Brent as Moscow seeks to switch its exports from Europe to Asia after Western countries committed to stop buying from Russia after its Feb. 24 invasion of Ukraine.
China appears set to buy up even more Russian oil in future months. Beijing issued new crude import quotas for non-state refiners on June 28, boosting the amount of oil they will be allowed to buy compared to last year’s quotas.
The independent refiners typically buy spot cargoes and have favoured Russian crude in the past as it tends to be cheaper to buy and ship and doesn’t require long-term contracts, which the smaller refiners can’t access because they lack suitable credit facilities.
The new quotas will allow them to import 52.66 million tonnes of crude, bringing the total for the year to 161.69 million tonnes, which is up from 157.83 million tonnes at the same time in 2021.
THEORY VERSUS REALITY
In theory the extra crude quotas should do a number of things.
Firstly, they should boost China’s overall oil imports, which are down 1.7% in the first five months of the year compared with the same period in 2021.
Secondly, they should boost the available refined products for the domestic market just as consumption recovers as most of the COVID-19 lockdowns are eased.
Thirdly, they should ease some tightness on the global oil market if it means that crude China would normally have bought from other countries can now be sold to those buyers who have stopped taking Russian cargoes.
And fourthly, they may encourage Beijing to issue more refined fuel export quotas, which could ease the shortage of diesel in Asia, which has seen the profit margin for producing the transport fuel rise to record highs of around $60 a barrel.
The problem with theories is that they don’t always pan out in reality, and the risk is that China simply buys more oil from Russia, while maintaining volumes from other suppliers, thus tightening the global crude balance even more.
A further risk is that Beijing doesn’t offer any more fuel export quotas, thus keeping Asian supplies tight.
China’s exports of refined fuels slumped 38.5% in the first five months of the year, according to official data, and the quotas issued so far this year are 41% below the same period in 2021.
Exports of diesel were just 29,000 bpd in May, down almost 93% from the 406,000 bpd in May last year, while gasoline shipments were 230,000 bpd, a drop of 45.5% from the 425,000 bpd in the same month last year.
While the global market for refined fuels has been tightened by the loss of much of Russia’s exports, the sharp decline in China’s exports of products is making the situation worse.
Source: Reuters (Editing by Richard Pullin)