China's teapots opt for reduce utilization amid sanctioned feedstock shortages

China's small independent refineries in Shandong, also known as teapots, are likely to continue cutting their utilization rates due to a feedstock supply shortage caused by recent sanctions on the Russian and Iranian energy sectors, refining and trading sources told S&P Global Commodity Insights on Jan. 21.

Teapots rely almost entirely on sanctioned crudes for their feedstock. Compared to bidding for increasingly expensive regular crudes to sustain utilization, teapots are more likely to cut their throughput as they wait for suppliers to stabilize Russian and Iranian flows.

Data from JLC showed that the teapots lowered their average utilization rate by 0.49 percentage points week over week to 55.9% as of Jan. 15 and forecast the downward trend to extend.

The logistical disruptions due to fresh US sanctions, coupled with Shandong Port Group's move to blacklist sanctioned ships, have slowed the delivery of their Russian and Iranian crude imports.

"Ports in Shandong started to discharge Russian crudes from sanctioned vessels with exemption, but more of the barrels are waiting for suppliers to find non-sanctioned vessels for ship-to-ship transfer," a second source with a Shandong-based teapot refinery said.

He added that some sanctioned ships had booked two to three trips to Shandong from January to early February, which must stop loading after Jan. 10, leaving few non-sanctioned ships available in the market.

ESPO, Iranian Light offers rise

According to market sources, offers for Russian ESPO carried by non-sanction ships surged to ICE Brent plus $5-$6/b on a DES Shandong basis. Prior to the sanctions, strong demand for ESPO Blend had seen delivered prices to China reach levels not seen in two years, at premiums of just above $2/b to ICE Brent crude futures, DES Shandong for February-arrival cargoes.

One trader said any delivered sales of ESPO Blend at this point will likely also see a sharp plunge in value, with differentials swinging back to discounts against ICE Brent, DES China.

"We prefer to lower throughput to wait for a better opportunity," a teapot source said.

Very few Iranian cargoes have been discharged in January, as they either tried their luck to wait for docking permission, head to other ports in China, or became floating storages for another STS transfer, market sources said.

Meanwhile, according to refinery sources, the discount of Iranian Light offers narrowed to 50 cents/b-$1/b against ICE Brent on a DES Shandong basis from around $1.8-$2/b in early January.

Shipping sources said it would take about three months to rebalance the shipping market to recover the flows, leading to sanctioned Russian and Iranian grades being offered at higher cash differentials.

Moreover, "banks are reluctant to pay the barrels carried by sanctioned ships, and even the sanctioned barrels in non-sanctioned carriers," an independent refining source told Commodity Insights on Jan. 20.

Expensive regular crudes

In this case, state-run oil companies and large private refineries that process seaborne Russian crude have increased their purchases of regular crude from the Middle East, West Africa and the Americas in January.

Market sources said the large private Rongsheng Petrochemical was heard to have bought two April-arrival cargoes of Access Western Blend at discounts in the $2s/b to June ICE Brent, DES Zhoushan, along with a cargo of Cold Lake Blend at a discount in the $1.70s/b to ICE Brent, DES.

Another large independent refiner, Shenghong, was also heard to have bought a cargo of Cold Lake Blend for April delivery -- marking the second consecutive month of purchases for TMX crude by the refiner.

However, teapot refinery sources believe the price of Canadian crudes suitable for producing asphalt is still too high to accept and does not yield them any profit.

This may deter them from other regular crudes, which are priced at premiums to ICE Brent, DES, other market sources said.

On the other hand, offers for West African crudes and those from Brazil have also risen to above $5-$8/b to ICE Brent, DES, which are at least $3-$4/b higher than a month earlier.

"These higher offers will make it difficult for independent refineries to accept, as they cannot make any profit," said a trade source.

"Not all independent refineries have enough feedstock to support their operations for more than a month, but more importantly, they are more inclined to cut utilization rates rather than rush to buy other regular crudes that are already too expensive to afford," said a market analyst.