Urals imports by China's independent refineries hit record high in March

The growing affinity for deeply discounted Urals among China's independent refining sector lifted overall inflows of Russian crude to a record high in March, but the trend may not spill over to coming months as competition for cargoes heats up coupled with OPEC+ production cuts.

When the European Union ban on Russian crude came into effect in early December, market activity from Chinese buyers paused for a while, as they sought clarification on logistics and trade financing. However, it picked up sharply soon after, with buyers taking advantage of the plentiful availability and low prices of the Urals barrels. This momentum has accelerated further after the Lunar New Year holidays, according to market sources.

As a result, a few of the delayed deliveries of Urals cargoes, which were loaded in December, arrived in March with the January-February loading barrels, pushing the monthly volume to a record high. Usually, it takes more than 35 days for the Urals cargo to reach China.

Of all the Urals that arrived in China in March, about 168,000 b/d (710,000 mt) went to the state-owned sector. The independent refineries discharged the rest, about 378,000 b/d, which was more than six times their volumes of 239,000 mt seen in February, data collected by S&P Global Commodity Insights showed.

This brought imports of Russian crude by China's independent refineries to rise sharply by 32% to 1.36 million b/d, or 5.74 million mt, from the previous record high in February. This is set to push China's total crude inflows from the producer to a fresh record high from 2.01 million b/d in February.

However, China's independent sector is unlikely to witness similar monthly volumes from April onward amid intensifying competition and production cuts by OPEC and its allies, according to Sijia Sun, an analyst with S&P Global.

"We had been expecting crude oil supply-demand to be tight in the second half of the year due to China lifting its zero-COVID policy, but we now expect the supply-demand balance to be even tighter due to these additional curbs on supply," Nomura, a Japanese financial holding company, said in a recent research note.

"From May onward, arrivals of Russian crudes are likely to fall due to the output cut by producers and intensifying competition against other buyers from the state-owned sector in China and refineries in India," a Shandong-based trade source said.

OPEC and its allies surprised the markets earlier in March by announcing plans to make more than 1.6 million b/d of voluntary production cuts from May onward until December 2023, lifting oil prices. S&P Global forecasts global oil demand to grow by 2.3 million b/d in 2023, driven by China, despite concerns over feared slowdowns in the US and Europe.

Russian crude prices rise

As Urals becomes more popular in China, the discount of the grade for July delivery had gradually narrowed to $8-9/b against ICE Brent Futures on a DES Shandong basis as of April 10, according to market sources in China.

In comparison, the price for the Russian Urals for March deliveries was at ICE Brent Futures minus $13-$14/b on a DES Shandong basis.

Meanwhile, the price of May-delivery ESPO cargoes also rose to around $6/b against the ICE Brent Futures on a DES Shandong basis, from discounts of about $7/b for April deliveries, sources said.

Imports of the most favored ESPO stayed at the record high level of 780,000 b/d (3.3 million mt) for the third straight month in March, S&P Global data showed.

As a result, ESPO imports surged 71.1% year on year to 9.58 million mt in Q1 and remained the top feedstock choice among independent refiners. They accounted for 19% of the sector's feedstock import mix of 51.66 million mt. Their market share was 13% in the same period a year ago, S&P Global data showed.

In addition to the small-sized independent refineries in the Shandong province, the mega private complex Hengli Refinery (Dalian) Petrochemical received its first batch of ESPO comprising 400,000 mt and 565,000 mt of Urals in March.

The 400,000 b/d refinery is likely to take more Russian barrels in April, including four to five ESPO cargoes, market sources said.

Its peer, the 320,000 b/d Shenghong Petrochemical also discharged one ESPO cargo of 100,000 mt in March, its first Russian cargo since the start of the Russia-Ukraine conflict.

Varandey crude arrivals from Russia's Arctic region also soared 135.7% on the month to 542,000 mt in March.

Independent refineries also imported 300,000 mt of Russian fuel oil/vacuum gasoil in March, lifting the share of overall Russian feedstock barrels, including crude, to 28% of its feedstock mix in Q1, from 13% a year earlier.

Refining sources said they may lift Russian fuel oil/VGO imports when Russian crudes become expensive. The sector usually reports imported VGO barrels as fuel oil.

Alternative Malaysian inflows

Fuel oil/VGO, bitumen blend and blended crudes loaded from Malaysia are also good alternatives, they added.

Malaysia is the blending hub for Iranian and Venezuelan materials. In Q1, it was the top feedstock supplier for independent refineries with a 30.5% share, up by 13 percentage points from a year earlier, S&P Global data showed.

Independent refineries imported 920,000 mt of fuel oil/VGO from Malaysia in March, pushing their total fuel oil inflows to rise 29.4% month on month to a multi-year high of 1.22 million mt.

Bitumen blend imports from Malaysia were also higher than expected, rising 16% from February levels to 1.58 million mt. Malaysia is often reported as the origin of blended Venezuelan crudes.

In Q1, bitumen blend imports also fell 3.7% year on year to 4.52 million mt, S&P Global data showed.

Top feedstock suppliers for China's independent refiners (000 MT)

Top feedstock imports for China's independent refiners (000 MT)

*Including imports from other countries, and other grades

Source: S&P Global Commodity Insights