China's HSFO imports soar as independent refiners lap up cheap Russian barrels

China's high sulfur fuel oil import volumes more than tripled over December-January, compared with the preceding two months of October-November, as the independent refineries snapped up cheaper bargained barrels from Russia.

The trend is expected to continue, likely with more vigor in February, especially after the recently imposed price caps on Russian-origin petroleum products, including fuel oil, market sources said Feb. 10.

China has imported about 2.3 million mt HSFO over December-January, about 235% higher compared to 687,000 mt during November-December, according to Kpler shipping data.

"Chinese private refiners could be using bargained Russian fuel oil as an alternative refinery feedstock. With the Feb. 5 EU sanctions and G7-led price cap, we expect to see continued Russian fuel oil inflows into the East of Suez markets," said Shu Zhang, Asia oil market analyst at S&P Global Commodity Insights.

"Chinese private refiners could show a continued appetite as long as there is sufficient price incentive. This can also allow them bypass crude import quota limitations," Zhang added.

China's HSFO imports from Russia have surged to about 355,000 mt in the two-month period ended January, from 204,000 mt during October-November, Kpler data showed.

Meanwhile, Malaysia, which is typically the biggest HSFO supplier within the region, also exported about 653,000 mt to China in December-January, up 123% from October-November, Kpler data showed.

"China has been picking up quite a bit of Russian straight run fuel oil as feeds for its teapot refineries [ independent refineries] in recent weeks," a Singapore-based fuel oil trader said, adding, however, that the market was keeping a close eye on the impact of the EU's price cap on Russian fuel oil.

China's independent refineries, sometimes known as teapots, are mostly located in the country's eastern Shandong province.

"We heard that Shandong buyers increased their purchase volume by the end of last year... Usually, the independents would buy some diluted bitumen or fuel oil as their crude import quotas were not enough to them. And the buying timing would mostly depend on prices and left quotas. They received extra quotas in October 2022 and [so] limited quota is not the key reason this time," said Sijia Sun, China oil markets analyst at S&P Global.

Steady demand from China, on the back of a stable downstream bunker market for the high sulfur grade in recent weeks, have bolstered the 380 CST HSFO cargo prices to gain 14% since end-November, S&P Global data showed, while traders expect the market to remain relatively supported in the near term.

PetroChina -- recently been one of the most active participants in the Platts Market on Close assessment process -- has, so far this month, bought 220,000 mt of 380 CST HSFO in the MOC, S&P Global data showed.

Trade flow in focus

Although Asia is preparing to see more Russian oil products flowing into the region following the EU ban that came into effect Feb. 5, some trade sources said the persistent arrivals might also ease if the recently imposed ban forces Russian refineries to cut run rates, trade sources said.

"Russian HSFO will head to places where it can find homes. Last summer Russian HSFO headed to the Middle East and South Asia. I don't think that trade flow will change. Essentially, Russian HSFO redirection is an East of Suez story," said Aabha Gandhi, senior oil products analyst at Kpler.

"China doesn't need the high sulfur residue barrels per se, as it can anyway run its primary units at elevated rates, due to the ample availability of discounted Russian crude. The more likely destination for Russian HSFO is in the Middle East and South Asia, where seasonal demand is just about to start picking up," Gandhi added.

Chinese independent refineries' total Russian feedstock imports, including 140,000 mt of fuel oil, have jumped 39.6% from December to a fresh record of 4.38 million mt in January, data compiled by S&P Global showed.