China Is Spoilt for Choice of Oil

China Is Spoilt for Choice of Oil

Even while demand is hampered by trade restrictions, Chinese oil purchasers have a wide range of options, including inexpensive Russian crude, sanctioned Iranian oil, and regularly-taken Middle Eastern barrels.

While a wave of anti-virus restrictions has slowed current consumption, China has a long list of suppliers that refiners can tap whenever demand picks up. Given the turmoil in Ukraine, many other purchasers have shied away from Russian cargoes — from ESPO in the Far East and Urals in the west — clearing the way for mainland takers. Thousands of Iranian and Venezuelan barrels, however, remain afloat in Chinese waters.

The complicated picture reveals that China has benefited from the European crisis, which triggered a jump in crude prices to their greatest level since 2008, followed by a period of volatility. Since the invasion, Beijing has stood with Moscow, thereby allowing refiners in the world’s largest oil importer to quietly handle Russian barrels that the US and UK have avoided. Furthermore, the European Union is working on its own prohibition.

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According to traders who asked not to be identified, at least one big Chinese refinery has taken less long-term supplies from Saudi Aramco for cargoes to be transported in June. In contrast, some other North Asian refiners have requested the Saudis for more supplies since Middle Eastern barrels are cheaper than comparable long-haul cargoes from the United States and the North Sea.

Chinese oil consumption is still in the spotlight, as additional lockdowns, especially in Shanghai, raise worries about how much and for how long demand may fall. According to industry analyst OilChem, Chinese state refineries aim to process 4% less in May than in April.

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“The Covid scenario is adding to the uncertainty surrounding oil demand and the prognosis for Chinese refinery operations,” said Jane Xie, a senior oil analyst at data and analytics firm Kpler. “The potential of an EU ban on Russian oil will certainly focus attention on China, and whether they can replenish their supply after their demand problems are resolved.”

According to maritime analytics businesses Vortexa and Kpler, some 17 million to 20 million barrels of petroleum, largely Iranian and Venezuelan, are floating off the coast of China. While this is down from 20 million to 30 million barrels last month, these cargoes have had trouble finding customers because to slow demand from private processors since February, according to Li.

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Traders said Venezuelan crude was being offered at historic discounts with flexible yuan payment terms, while cargoes from Russia’s Urals were also being presented at deeper discounts to Brent on a delivered basis to China, with discounts of $8 a barrel or more. According to them, a Chinese processor in Shandong bought Urals at a discount of $6.30 to $6.50 in the most recent reported trade late last month.

“Given that the rise in Russian oil intake so far has only been 3%, based on the current pace-to-date in May,” Xie added, “it could still pay out for Chinese refiners to wait for additional price cuts.” Still, she claims that this hasn’t happened definitively yet.

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