SINGAPORE (Reuters) – China is making its biggest cuts in months on Russia’s Espoo crude amid weak demand and thin refining margins, although actual prices paid by refiners could exceed price ceilings imposed by Western countries this week.
The $60-a-barrel cap, set by the Group of Seven nations, the European Union and Australia, went into effect Monday to limit Moscow’s ability to fund its war in Ukraine, though Russia vowed to defy it.
China, Russia’s largest oil buyer, has not agreed to a price cap. Traders said they were going about their business as usual.
Independent refiners in China, dominant customers of ESPO, a grade exported from Russia’s Kozmino port in the Far East, insure shipments almost all on a handover basis from traders who arrange freight and insurance, shielding refiners from potential secondary penalties that could result from price caps. .
Chinese refiners prefer light, sweet crude because of its proximity and medium-high distillate yield of oil.
But the Chinese government’s COVID-free policy has weakened the country’s economy and demand for crude oil.
At least one ESPO cargo that arrived in December last week was sold to an independent refiner at a $6-per-barrel discount to February’s ICE Brent price on a freight-delivery (DES) basis, according to four traders with knowledge of the deal. .
That compares with a premium of $1.80 a barrel three weeks ago. At current Brent levels, the discount of $6 indicates a price of $68 per barrel including freight and insurance costs.
“They (the independents) don’t really care about a price cap,” said a commercial executive with an independent refiner. “All they do is crunch the numbers to see if the prices that are being delivered turn a good profit or not.”
“Domestic refining margins are still suffering,” the executive added.
Two trade sources said two cargoes loaded in December were still unsold on Thursday and offers had fallen to discounts of between $7 and $8 a barrel.
Some early deals were made for January loaded cargoes at $4 a barrel below ICE Brent crude for March, the lowest for the receiving month ESPO since July.
Benchmark Brent crude fell to its lowest since January on Tuesday, at less than $80.
Traders said ESPO’s licenses could soon attract new buying from Chinese buyers on the hope that Beijing’s easing of epidemic control over the past week could reignite demand.
“Some buyers of Russian crude are expected to take a cautious approach in the first few weeks, reducing imports until the legal implications of this trade become clear,” Rystad Energy analysts Victor Kurilov and George Lyon said in a note on Tuesday.
Analysts added that with a price cap in place, China, India and Turkey could have more negotiating power.
In Shandong, a province with many independent refineries, known as teapots, ESPO also faces growing competition especially from Iranian oil, which traded at a discount of nearly $10 to ICE Brent last week.
Vortexa Analytics, which specializes in tanker tracking, estimated that Chinese imports of Iranian oil, passed off as supplies from exporters such as Malaysia and Oman, may have hit a monthly record of nearly 4.7 million tons in November.
(Report) Submitted by Muyu Xu and Chen Aizhou; Edited by Bradley Perrett
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