China's independent refiners set to embrace wide variety of Russian crude grades

China's independent refineries in Shandong province are keen to embrace Russian crude not just in abundance but also variety, with the sector poised to receive multiple sweet crude cargoes loaded from Russia's Northwestern Arctic region.

At least five cargoes, totaling 605,000 mt, or 4.43 million barrels, of crude oil from Russia's Arctic region are expected to call Shandong ports by end February, marking the first arrival of light sweet Russian Artic crude grades into China this year, refinery and feedstock trading sources based in Shandong told S&P Global Commodity Insights Feb. 21-24.

The shipments include four Varandey crude cargoes and one Novy Port crude cargo, which are light sweet Russian Artic grades loaded from the Kola and Umba PSOs in northwestern Russia.

Two cargoes discharged at Qingdao and Rizhao ports earlier in February, while the remaining tankers are expected to arrive in the coming days, trade sources said.

Russian Arctic crude grades consist of light-medium sweet Novy Port and Varandey and heavy sour Arco. Prior to Russia's invasion of Ukraine, these grades were typically sold to European refiners and rarely to end-users in China.

Around four to five Varandey cargoes are offered each trading cycle and most are expected to be diverted to China in 2023 amid Western sanctions, trading sources in Shandong said.

The Shandong refining sector typically heavily favors Far East Russian ESPO Blend crude but the shipments of Arctic Russian grades signal its feedstock versatility and flexibility. Shandong-based Dongming Petrochemcal took two cargoes of Russia's Sakhalin Blend crude in January, which is often considered too light for the private refining sector.

Independent refiners are expected to have little issue processing Varandey and Novy Port crudes as the two grades share similar specifications to the Shandong refining sector's top two Russian feedstocks ESPO and Urals, market participants said.

Varandey, produced by Lukoil, has gravity of 35-37 API and 0.5% sulfur content. The API gravity for Novy Port crude from Novoportovskoye is approximately 30-35 degrees with 0.1% sulfur content.

The API gravity for ESPO is approximately 34-35 degrees with a sulfur content of 0.58%-0.65%, while Urals is a medium sour grade with a typical API gravity of 31 and 1.4% sulfur content.

Attractive offers, spot discounts

The two Russian Arctic crude grades are at least $2/b cheaper than ESPO, making it attractive to independent refineries, said a feedstock trading and management source at an independent refiner in Shandong.

The Varandey crude traded at a discount of $10/b to front-month ICE Brent Futures on a DES Shandong basis, trading sources with direct knowledge of the matter said.

Price differentials for Russian grades have been broadly under pressure in recent weeks, with ESPO for March delivery seen traded at discounts of around $8.50/b to ICE Brent futures, DES Shandong, from discounts of around $8/b previously, trading sources said.

Offers for Urals crude were also seen at discounts of around $14/b to ICE Brent futures on a DES Shandong basis for April delivery cargoes, compared with discounts of around $13/b seen in the previous trading cycle.

Reflecting the attractive price tags and offers, inquiries for Urals have been growing and demand for Iranian cargoes has been slipping as a result, refinery and trading sources said. Independent refineries now have a bigger pool of Russian grades to choose from, making it quite difficult for Iranian cargoes to sell in China, the sources said.

Robust import momentum

More Russian crudes are expected to flow into the independent refining sector in coming months, despite Russia's plan to cut output by 500,000 b/d in March.

From the Russian Artic-China voyage, at least two more Varandey cargoes are expected to land in Shandong next month, according to Shandong-based trading sources and Kpler vessel tracking.

"We don't see that the supply cut has affected the market fundamentals as the price falling further," said a feedstock management source at another independent refiner.

In January, the independent refining sector took record 4.56 million mt (1.04 million b/d) of crude from Russia, with shipments of ESPO crude reaching a record monthly high of 3.3 million mt (780,000 b/d).

Maintaining the robust Russian crude trading momentum, at least 30 cargos totaling 3 million mt of ESPO, Sakhalin Blend and Urals are expected to call Shandong ports in February, while at least 30 cargoes of ESPO will likely arrive in March, according to analysts at S&P Global and Shandong-based trading sources.

China's overall Russian crude imports, including purchases by both state-run and private sector refiners, rose 10.2% year on year to 1.75 million b/d in 2022, customs data showed. S&P Global analysts expect Russian crude inflows in 2023 to average around 7 million-8 million mt/month or even higher.