China raises 2023 fuel oil import quotas by 3 mil mt to allow feedstock purchases

China has raised its 2023 fuel oil import quotas by 3 million mt for non-state-run enterprises, the Ministry of Commerce announced Nov. 27, which will allow independent refineries to bring in more barrels as alternative feedstock for the remainder of the year.

MOFCOM said on its website that qualified enterprises would follow the existing rules to apply for quotas to import fuel oil this year.

Unlike quotas for importing crude oil or exporting oil products, which are allocated to each oil firm, refineries or oil companies are required to apply for the fuel oil import quotas cargo by cargo until the annual volume is hit, in a first-come-first-served manner.

With the increase as expected, the annual fuel oil import allowance reaches 19.2 million mt, up from 16.2 million mt set in early-January.

The quotas usually applied for importing fuel oil into the domestic markets are used as feedstocks, while the barrels imported and saved in bonded zones for bonded bunkering do not require any allowance.

But this year, due to the combination of competitive prices of Russian fuel oil, strong refining margins in the first half of the year and tight crude import quota availability, small independent refineries had almost used up the 16.2 million mt of fuel oil import quotas as of the end of October, according to refining sources.

China imported 19.2 million mt of fuel oil in the first 10 months of 2023, more than double the 9 million mt in the same period last year, according to customs data. The imports include barrels saved in bonded warehouses, which do not use fuel oil import quotas.

Quotas in need

In November, around 15 cargoes totaling 15.5 million mt of fuel oil arrived for independent refineries, up 123% from 695,000 mt in October, showed data from S&P Global Commodity Insights.

"We have three fuel oil cargoes to arrive in November. The new quotas enable us to bring them in," said an independent refinery source in Shandong.

"It is very possible that the new quotas will be used up by the year end, considering that at least 1 million mt of fuel oil are due to arrive in December on top of those in November," said an analyst in Shandong.

As the quota increase had been widely expected since early November, some refineries had booked cargoes prior to mid-November.

The refining sources said the announcement was encouraging as there won't be any disruption of fuel oil feedstock imports amid sufficient quotas when the year-end and new year comes.

Without the quotas, the independent refineries pay about Yuan 10/mt ($1.37/mt) to procure imported fuel oil via state-run trading houses by using import quotas for state-run enterprises, the sources said.

Premiums up

The new allocation will help independent refineries cut their dealing fee for feedstocks, but would push up fuel oil prices if they rush to increase their procurement for the fuel by the year end, market sources said.

Russian M100 fuel oil was heard offered at a premium of around $75-$80/mt against the Mean of Platts Singapore 380 CST HSFO assessment lately, which was up from deals done at around $70/mt in mid-November, sources said.

Another refinery source revealed that there are few December cargoes left for refineries to purchase, especially for Russian M100 fuel oil, the favored grade.

"With the prices for M100 rising, the margins also become very thin for refineries to crack fuel oil," said the source, making them less willing to purchase product.

A Dongying-based refineryhad imported about 40,000 mt of fuel oil previously but then suspended imports of the productdue to a lack of quotas, and also did not book when there were market indications that more quotas would be allocated in mid-November.

Platts assessed the Singapore 380 CST HSFO cash differential over MOPS 380 CST HSFO assessments at an average of minus $2.86/mt over Nov. 1-24, falling to deeper discounts than the minus 5 cents/mt across October amid very ample supplies, showed S&P Global data.

The November Singapore 380 CST high sulfur fuel oil swaps crack spread to Dubai crude swaps most recently strengthened to an over two-month high of minus $10.36/mt Nov. 17, before gradually easing to minus $12.05/mt Nov. 24, S&P Global data showed.