Cheaper options make Brazilian crude vanish from China independents' radar

Brazilian crude flows to China's independent refineries in May fell to zero for the first time since January 2016 as buyers turned to attractively-priced barrels from Russia and Iran, a move that would potentially help the refiners to boost their refining margins, S&P Global Commodity Insights' data showed June 8.

Once a strong favorite of the Shandong-based independent refiners, shipments from the South American exporter has been on a downward trend since July 2020, when volumes hit a historic high of 3.8 million mt, or 899,000 b/d, S&P Global data showed. In comparison, independent refineries imported 499,000 mt of Brazilian crude in April 2022 and 1.5 million mt in May 2021.

As discounted Russian crudes are available in plenty -- a market situation which is likely to continue in the foreseeable future -- trade sources said independent refiners will find it too hard to resist and make them relatively more affordable compared with shipping in crudes all the way from Brazil.

In addition, traders said even some Iranian crude volumes had displaced Brazilian supplies, since crudes from both Russia and Iran were offered at discounts against ICE Brent futures for delivery into Qingdao.

Platts assessed differentials for September delivery barrels of Brazilian Tupi crude at a premium of $5.62/b to Dated Brent, DES Qingdao June 7, up 21 cents/b on the day, equating to a premium of $7.84/b to November ICE Brent futures, DES Qingdao. Limited exports and robust demand from Europe have kept Brazilian prices high, traders said.

"We see Europe taking more cargoes than before. And almost all Brazilian cargoes that come to China are taken by state-owned companies. Independent refineries may have just one or two cargoes in coming months," said a China-based crude oil trader.

Brazil's Petrobras, which holds a 67.216% operating stake in the Tupi oil fields, continues to prioritize supplies for the domestic market over exports for its Tupi crude sales, trade sources told S&P Global.

As a result, independent refineries' crude imports from Brazil slumped 61.2% year on year to 2.95 million mt in January-May, dropping to the position of seventh-largest supplier from fourth-largest in the same period last year.

More Russian crudes

Imports from Russia are heading north, with volumes in May doubling year on year to 2.2 million mt and up 8.1% from April, S&P Global data showed.

ESPO contributed the biggest share to this increase in May, surging 141.7% year on year and rising 10.5% from April to 2.1 million mt.

In June, inflows of Urals are set to join the bandwagon and push up imports from Russia, S&P Global data showed. At least nine cargoes of Urals, amounting to 880,000 mt, are set to arrive in Shandong for the independent refineries in June, with six cargoes scheduled to head to Qingdao Port, two into Yantai, and the rest to Rizhao.

The expected arrival volume of Urals in June alone is close to the total Urals imports by the sector in 2021 of 925,000 mt, S&P Global data showed. Independent refineries in 2020 imported 5.14 million mt of Urals.

Independent refineries halted the flow of Urals in November 2021 due to more competitively priced alternative supplies, and subsequently stayed away from buying until late April despite the price of Urals falling to deep discounts against benchmarks following Russia's invasion of Ukraine in late February.

In late April, Urals cargoes for late-May or early-June deliveries were trading at a discount of around $5-$6/b to the benchmark ICE Brent crude futures on a DES Shandong basis, market sources said.

Cautious on Iranian purchases

Some inflows of Iran-origin cargoes are expected to continue, although volumes could post a decline following a new set of sanctions imposed by the US authorities, refiners and traders said.

Independent refineries' Iranian crude imports fell 21.2% from April to a seven-month low of 1.78 million mt in May, but were still 32.8% higher than the level a year earlier, S&P Global data showed.

Nearly all May arrivals are reported to the customs as Malaysian crudes, mostly as Mal Blend, followed by Nemina.

Independent refiners are already adopting a cautious stance and staying on the sidelines to buy Iranian oil as US authorities announced May 25 new sanctions on several individuals and entities involved in an international oil smuggling and money laundering network that has allowed Iran to skirt oil sanctions. The entities included Chinese trading companies and a Shandong-based independent refinery, S&P Global reported.

"As prices of other regular crudes surge while domestic demand is yet to fully recover, refineries have to cut costs by taking cheap crudes to survive, including Iranian crudes and Russian crudes," a Beijing-based analyst said.

The discount of Iranian barrels against ICE Brent futures has widened to around $8/b in the week started June 6 from $6-$7/b on a DDU basis in Shandong a week ago, market sources said.

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

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

*Including imports from other countries, and other grades

Source: S&P Global Commodity Insights