China's independent refiners buying interest for Iranian feedstocks steady in May

Buying interest for Iranian feedstocks was steady in May among China's independent refineries in Shandong province, despite deepening discount to ICE Brent compared with the levels seen in April, refining and trading sources told S&P Global Commodity Insights on May 14.

Iranian Light was largely offered at around a discount of $5-$5.50/b to ICE Brent on DES Shandong basis as of May 14, stable from late April, but widened from the discount of $4-$4.5/b in the first half of April, according to market sources.

Independent refineries' Iranian feedstocks imports in April fell 5.5% from March to 4.54 million mt (1.11 million b/d), a second monthly straight drop, due to weak refining margins, data from Commodity Insights showed on May 14. The volume comprised of crudes and fuel oil.

However, their combined imports in January-April jumped 21.2% year on year to 18.24 million mt due to the low base of 15.05 million mt in the same year-ago period, when Russian feedstocks were more attractive.

Thin trades

"There have been some inquiries, but trading remained thin as demand has remained generally low due to weak margins," a Shandong-based trade source said.

Refining margins at Shandong independent refineries for processing imported crudes dropped Yuan 24/mt (45 cents/b) on the month to a loss of around Yuan 9/mt in April, according to local energy information provider JLC.

"The weak margin continues in May as domestic gasoline, gasoil prices will fall soon following the benchmark crude oil prices when demand is slow," a Beijing-based analyst said.

The benchmark front-month ICE Brent settlements averaged at $83.35/b in May as of May 13, falling from the monthly average of $89/b in April and $84.66/b in March, Commodity Insights data showed.

Adding to about 300,000 b/d of capacity shut for maintenance in May, the average utilization rate at Shandong independent refineries is expected to maintain at the low levels as around 58.7% seen in April and March, according to JLC data.

Meanwhile, the Biden administration in late April has leveraged a series of new sanctions to tighten the screws on Iranian oil trade and pressure Chinese buyers to reduce exposure to Iranian oil, but the legislation seems to have little impact on the oil trade currently, sources said.

"There seems to be little impact on the new sanctions by the US on the Iranian cargoes, as trades remain normal while price largely stable since the US announcement," said another trade source in Shandong.

The package included a measure that imposes sanctions on foreign ports, vessels and refineries involved in the trade of sanctioned Iranian petroleum products. The so-called Stop Harboring Iranian Petroleum Act also includes sanctions on entities involved in ship-to-ship transfers of Iranian oil.

Inflows may rise as output surges

"More Iranian crude barrels may flow to China if the producers increase output," a second Shandong-based trader said.

Iran was targeting an oil output increase of up to 400,000 b/d in its current year that started March 20, the country's oil minister Javad Owji said May 8, and spoke of a 60% output surge over the past 2.5 years. In the year ended March 19, Iran's crude output reached 3.55 million b/d in the year ended March 19.

Iranian cargoes, which are usually masked as blended crudes that originate from Malaysia, have been the main feedstock for independent refineries. These cargoes typically account for around 40%-50% of feedstocks imported by independent refiners, according to Commodity Insights estimates.

Commodity Insights collects information from trade and independent refinery sources, Kpler, shipping brokers and port sources, S&P Global Commodities at Sea, and those information also have been confirmed by sources with knowledge about the matter.