China’s independent refiners are increasing imports of discounted fuel oil blended from Russian barrels to use as a low-cost feedstock amid a lack of government oil import quotas for some of them, according to trade sources and data.
Western sanctions over Russia’s invasion of Ukraine, including a looming February 5 embargo and a price cap on refined products, have been pushing barrels of Russian fuel oil east to Asia at attractive discounts since last year.
From the second quarter of 2022, they flood ship-to-ship hubs in Malaysia and Fujairah, UAE. Traders are mixing these barrels with other oils to rebrand the fuel oil’s country of origin, clearing the way for ship insurance and financing that would otherwise be barred under sanctions, trade sources said.
The rebates offered on those fuel oil costs help improve margins at China’s independent refiners and replace oil that some companies can’t import without quotas, the sources said. The trade also provides a way to get Russian oil to market and bring much-needed export revenue to Moscow.
Independent refinery in eastern Shandong province says “We have been looking at Russian heating oil since December. It is cheap and does not require (gross) import quotas,”.
The refinery has received no government crude oil quotas in the past year and buys mostly primary fuel oil to make diesel and gasoline, said the executive, who declined to be identified because he was not authorized to speak to the media.
Discount of about $5 to benchmark ICE
Those barrels of blended fuel oil last traded at a discount of about $5 to benchmark ICE Brent based on delivery to Shandong, one source said. Values ​​for high-sulfur fuel oil relative to crude oil have fallen into deeper discounts since the second quarter of last year, with cracks hitting record lows in late October.
China total fuel oil imports 1.76 million
China’s total fuel oil imports rose to about 1.76 million tonnes in December, the most since September 2021, official customs data showed. The increase was driven by a surge in shipments from Malaysia to more than a one-year high of 620,000 tonnes, while monthly imports from the United Arab Emirates rose to 471,000 tonnes, the most in two years.
Meanwhile, direct imports of fuel oil from Russia fell to 187,000 tonnes in December after peaking at 554,000 tonnes in October, although total imports from Russia more than doubled year-on-year to 3.1 million tonnes in 2022.
Western trading houses were the main suppliers of those fuel oil supplies to China, four major trade sources who closely monitor flows said, adding that December’s elevated levels would continue into February and beyond. One of the leading suppliers of these barrels to China is Swiss trader Vitol, they said.
The Brilliant Jewel, a floating storage facility chartered by Vitol, has carried out ship-to-ship transfers over the past four months with at least six vessels that previously loaded fuel in Russian ports, an analysis of shipping data at Reuters’ Refinitiv Eikon showed.
A second Chinese fuel oil trader said companies have relaxed their handling of Russian barrels after initial confusion over the Group of Seven price cap and the potential risk of running afoul of sanctions.
“Initially, the market took a wait-and-see attitude ahead of December 5, but now many traders are moving fuel oil out of these two centers, with top western traders being more active,” the trader said.
Top Chinese bunker suppliers and traders such as Sinopec and PetroChina’s Chimbusco are also sending more Russian high-sulfur fuel oil to bunkers in east China’s Zhoushan and Qingdao, the sources said. Shipping records show the companies chartered several fuel oil shipments from the Malaysian port of Tanjung Pelepas to Zhoushan and Hong Kong over the past four months.
Written by : Vaishali Verma
