Macro

China’s Purchases of Russian ESPO Oil to Hit 12M Barrels, Lowest Since 2021

China's teapot refiners buy 12 million barrels of Russian ESPO crude, lowest since May 2021.

By Athena Xu

5/23, 01:49 EDT
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Key Takeaway

  • China's independent refiners are set to purchase the lowest volume of Russian ESPO crude since May 2021, with only 12 million barrels for June arrival.
  • Lower refining margins and cheaper alternatives from Iran and Venezuela, offered at discounts of $6 or more per barrel, drive this decline.
  • Teapots may cut processing rates to 52% capacity in early June, the lowest since May 2022, amid planned maintenance and reduced crude consumption.

Decline in Chinese Demand for Russian ESPO Crude

China's independent oil processors, known as teapots, are on track to purchase the lowest volume of Russian ESPO crude in over three years. As of now, refiners have bought about 12 million barrels of ESPO for June arrival, the lowest since May 2021, according to Kpler data. However, the trading cycle remains open for another week, and this volume could increase. The decline in demand is attributed to shrinking refining margins and the availability of cheaper alternatives. ESPO is currently offered at a discount of less than $1 a barrel to its benchmark, while some Iranian and Venezuelan grades are offered at steeper discounts of $6 or more.

Teapots, primarily based in Shandong province, have been grappling with lower refining margins this year, which may lead to operational cuts. Profits from converting crude into diesel in Shandong have halved this year, dipping below the 10-year average on several occasions, according to Mysteel OilChem. The industry consultant also noted that teapots might cut crude processing rates to around 52% of capacity in early June, the lowest since May 2022. Additionally, planned seasonal maintenance at refineries is further reducing crude consumption.

Russia's Crude Exports Rise

In the week leading up to May 19, Russia's crude exports saw a slight increase, driven by higher shipments from the Baltic and Arctic terminals. This uptick was partially offset by a decline in flows from the Pacific oil ports. The less volatile four-week average of exports continued its downward trend, slipping for the second consecutive week. Russia's export strategy for May appears more lenient compared to April, as the Kremlin transitions from curbing overseas shipments to implementing deeper output cuts. This shift aligns with the upcoming OPEC+ meeting on June 1, where Russia and other members will discuss extending voluntary output cuts into the third quarter.

Russia's seaborne crude shipments rose by approximately 140,000 barrels per day, reaching 3.39 million barrels per day in the week to May 19, up from 3.24 million barrels per day the previous week. This increase was primarily driven by more shipments from the Baltic port of Primorsk and the Arctic terminals at Murmansk. However, fewer departures from the Pacific ports of Kozmino and Prigorodnoye partially offset these gains. In total, 31 tankers loaded 23.7 million barrels of Russian crude during the week, an increase of about 1.01 million barrels from the previous week.

Geopolitical Tensions Drive Oil Prices

Oil prices remained steady amid heightened geopolitical tensions involving Russia and the Middle East. Brent futures traded near $84 a barrel, while West Texas Intermediate (WTI) hovered just below $80. The market's focus shifted back to geopolitical risks following a series of attacks over the weekend. A Ukrainian drone strike on a Russian refinery and a missile attack on a China-bound oil tanker in the Red Sea underscored the fragility of global energy supply chains.

Brent for July settlement was steady at $83.86 a barrel early Monday in Singapore, while WTI for June delivery, which expires on Tuesday, was down 0.2% at $79.87 a barrel. Despite these recent gains, the global benchmark remains about 9% higher this year, primarily due to OPEC+ supply cuts. However, prices have cooled since mid-April as geopolitical tensions had previously eased.

Impact on Global Energy Markets

The disruption at the Slavyansk refinery, targeted by Ukrainian drone attacks, has potential implications for global energy markets. The refinery, which processes approximately 80,000 barrels per day, was forced to halt operations. This facility has been a repeated target, with previous attacks occurring in March and April. The US has expressed concerns over these strikes, with US Defense Secretary Lloyd Austin stating, “Those attacks could have a knock-on effect in terms of the global energy situation. Ukraine is better served in going after tactical and operational targets that can directly influence the current fight.”

The halt in operations at the Slavyansk refinery could affect crude oil prices, given its significant processing capacity. The recent attacks come at a time when Russia's refinery runs had shown signs of recovery in the first half of May. However, the renewed drone strikes could reverse these gains, adding further volatility to the market. The situation underscores the interconnectedness of geopolitical conflicts and global economic stability, with energy markets being particularly sensitive to disruptions in supply chains.