China's small independent refineries double fuel oil imports in Feb amid good margins

China's small independent refineries doubled their fuel oil imports on the month in February amid good refining margins and tight supply of the alternative feedstock bitumen blend, refining and trading sources told S&P Global Commodity Insights Feb. 27.

The trend is likely to sustain unless margins fall or more Venezuelan crudes return to the market.

S&P Global estimated at least 11 cargoes totaling 1 million mt (198,000 b/d) to be discharged over February, compared with around 510,000 mt in January and December each.

Malaysia-origin fuel oil contributed the most to the increase, with the volume soaring 188% to 634,000 mt from 220,000 mt in January, according to shipping data from Kpler.

Russian barrels followed with 390,000 mt arrivals in February, jumping 178.6% from last month. Most of the other shipments were from Latin America, Kpler shipping data showed.

"Those Russian fuel oil cargoes were diverted to China market as Western buyers no longer purchase them," said a trade source.

But the refining margin of Russian M100 fuel oil is about Yuan 100/mt ($2.25/b) narrower than the Yuan 200-300/mt profit from Malaysian barrels, a Beijing-based analyst said.

M100 was traded at a premium of around $120/mt over the Mean of Platts Singapore IFO 380 CST, according to market sources.

The recent good margins for producing gasoline and gasoil made it possible for independent refineries to use fuel oil as a feedstock.

Turn to fuel oil

Some of the independent refineries have not been awarded any crude import quotas for 2023. These refineries usually either take imported crude in the domestic market with quotas bought from other holders or import bitumen blend.

They now have to turn to imported fuel oil as the recent tax investigation conducted by local governments threatens quota trading while supplies of bitumen blend fall.

These independent refineries include Luoyang Hongxing in Henan province and Wonfull Petrochemical in Shandong, both of which received one fuel oil cargo in February, according to port sources.

In addition, each of the regular fuel oil buyers Dongming Petrochemical and Yatong Petrochemical continued to take two fuel oil cargoes in February. These two refiners have higher feedstock volume requirements than their limited crude oil import quotas, leading them to use fuel oil as supplement.

Bitumen blend supplies drop

Meanwhile, only seven bitumen blend cargoes totaling 1.2 million mt are estimated to be discharged in February, falling 23.6% from 1.57 million mt in January as supplies from Venezuela drop.

"Some of those fuel oil cargoes were imported to replace bitumen blend, as fewer crude cargoes were loaded from Venezuela," a port source said.

Venezuelan crudes, mainly Merey 16, are the main components of bitumen blend that is prepared in Malaysian waters.

Bitumen blend imports have started to drop since October after reaching a recent high of 2.36 million mt, as Venezuela's state-owned PDVSA has suspended most of its oil exports for contract reviews.

Prices of bitumen blend rose to a discount of $22/b against the ICE Brent crude futures on a DES Shandong basis, according to marking sources. The bitumen blend deals were concluded at a discount of $23/b a few weeks ago.