China's fuel oil imports to continue uptrend in 2023 amid strong demand, tight crude quotas

Chinese independent refineries are likely to keep importing large volumes of fuel oil as feedstock for the rest of the year to compensate for tight crude quota availability, refinery and trade sources told S&P Global Commodity Insights July 25.

These independent refineries, mostly based in Shandong, ramped up fuel oil imports in June to at least 1.32 million mt from 80,000 mt in the same month last year, only marginally retreating from the recent high of 1.59 million mt seen in April, data from S&P Global showed.

The volume pushed up their imports to at least 6.96 million mt in the first half from a low base of 449,000 mt in January-June 2022, according to S&P Global data.

This in turn helped raise China's total fuel oil imports by almost 154.9% year on year to 13.33 million mt in the six months, with most of the increment coming from Russia and Malaysia, Chinese customs data showed.

"It is more likely refineries' feedstock fuel oil imports in the rest of the year would move around recent levels, unless they would gain extra crude oil import quotas or more of the quota-free heavy materials can be cleared as bitumen blend and other heavy oil," said Sijia Sun, an analyst with S&P Global.

Independent refineries have ramped up throughputs due to good refining margins amid discounted feedstocks and a domestic demand recovery, leaving their annual crude import quotas availability to only sustain the current monthly consumption until mid-October unless the government releases additional quotas, S&P Global reported.

Meanwhile, import clearance of heavy materials that are declared as bitumen blend or "other heavy oil" remains slow due strict specification checks even as Shandong customs has resumed the process, Shandong-based trading sources said.

These suggested that refineries' average monthly demand for imported fuel oil could sustain at volumes seen in the second quarter of at least 1.4 million mt/month, amounting to at least 8.4 million mt in the second half of the year.

Quotas become tight

The strong feedstock demand is expected to tighten fuel oil import quota availability for the first time in a decade.

Importing fuel oil also requires quotas, with the total volume for 2023 capped at 16.2 million mt for non-state-run companies, while imported barrels stored in bonded storages are free from the quota restriction. That is to say, only a part of China's fuel oil imports recorded in the customs data consume quota, including those barrels imported by independent refineries that S&P Global has reported.

Compared with crude oil, there are less restrictions in the fuel oil quota application method and there is no separate annual quota limit for each importer.

Before all the allowances run out countrywide for the year, a refinery or trading house is allowed to apply for quotas for a next cargo only when the clearance has been completed for the previous one. This rule prevents a refinery or trading house from securing sufficient fuel oil import quotas for several cargoes at a time.

Even then, independent refineries have found ways to get around the restrictions, refining and trading sources said.

Independent refineries can circumvent the rules by taking imported fuel oil from state-owned peers that bring in the barrels with quotas for state-run companies, some sources added.

Falling margins

Refinery sources said margins from processing fuel oil have been weakening for the last few weeks, capping their throughputs.

"The import cost for fuel oil was relatively high compared with crudes," said another refinery source.

Russian M100 fuel oil cargoes were offered at the Mean of Platts Singapore 380 CST fuel oil assessments minus $80/mt on a delivered basis, sources said, which would be around a $2/b discount when translating to ICE Brent futures on the same basis.

This compared with a discount of around $3-$4/b against ICE Brent futures on a similar basis for ESPO crude, sources said.