China’s teapot refineries slash crude runs as oil prices surge

Smaller independent Chinese refiners, known as teapots, are expected to scale back crude processing rates in April following a sharp surge in sanctioned oil prices and persistently weak domestic fuel demand, traders and analysts said, Reuters reports.

These refiners had benefited in recent months from low-cost stocks of Russian and Iranian crude. However, temporary US waivers allowing purchases of Russian and Iranian oil stranded at sea for 30 days have pushed prices sharply higher, as buyers—particularly Indian refiners—rushed to secure supply.

Run rates for teapot refineries, highly sensitive to margin swings, are projected to fall to around 50% after recovering to roughly 55% in February and March, said Sun Jianan, senior analyst at Energy Aspects.

Spot premiums for ESPO Blend crude for April and May shipments have swung to about $8 per barrel above ICE Brent, compared with a discount of around $8 before the outbreak of the US-Israeli conflict with Iran, traders noted. Similarly, the discount for Iranian crude delivered to China over the next two months is now near parity with ICE Brent, after exceeding $10 per barrel prior to the war’s start on February 28.

With discounts disappearing and Brent futures surging, teapots have delayed crude procurement for April and May arrivals. “Faced with narrowing margins as Beijing caps fuel prices despite rising crude costs, independent refiners are expected to curb output while awaiting market clarity,” traders added.

Shandong-based teapots still have low-cost inventories sufficient to last until late April, though some refiners under capital pressure may reduce run rates sooner, according to Zhang Yuxin, a refined products analyst at Horizon Insights.

Fuel demand from end-users has remained sluggish amid high prices. On March 23, China’s state planner, the National Development and Reform Commission, raised the maximum retail prices for gasoline and diesel by 1,160 yuan ($168) and 1,115 yuan per metric ton, respectively—the largest increase on record—though still below the broader rise in crude prices.

By Vafa Guliyeva