Chinese small independent refinery re-emerges in regular crude market

China's small-sized independent refinery has re-emerged in the regular crudes market for January arrivals, signaling they started to look for alternatives amid the rising prices of the sanctioned barrels, trade and refinery sources told S&P Global Commodity Insights on Nov. 14.

These refineries have increasingly relied on cheap sanctioned supplies from Iran, Russia and Venezuela since the Russia-Ukraine war began in 2022, with their feedstock mix nearly reaching 100% in 2024.

A Rizhao-based independent refinery has taken a VLCC of West African crudes, consisting of Pazflor to be loaded on Dec. 7-8 and Mostarda on Dec. 25-26, at around $1/b against the ICE Brent Futures on a DES Shandong basis, according to market sources.

The 70,000 b/d refinery in Shandong province, which holds 13.19 million barrels of crude imports quota in 2024, should receive the VLCC in January.

The last WAF cargo taken by the small independent refineries was 136,000 mt (997,000 barrels) of Pazflor seen in December 2022, with Chambroad Petrochemical as the buyer.

Small independent refineries refer to those with production capacities of 40,000-214,000 b/d, primarily located in Shandong province.

"When the regular barrels become competitive to the sanctioned crudes, why not [taking them] to get rid of the risks," a Beijing-based analyst said.

In addition to the fixed cargo, other West African crudes like Djeno were also offered at similar levels of around $1-$2/b for January delivery to ports in Shandong, which attracted inquiries from small refineries.

Prices become competitive

The analyst and a trade source noted that buying interest for regular sweet WAF crudes will increase when prices are about $3/b or less above sour Iranian Light, considering the specification differences and smoother transactions and payment.

Iranian Light offers in mid-November for December cargoes reached a discount of $2.50-$3/b against ICE Brent futures on a DES Shandong basis, sources said, up from late October deals at discounts of around $3.50-$4/b.

The sources added that Iranian Heavy prices for December delivery were also at a narrower discount of $5.50-$6/b against the same benchmark, compared with discounts of $6.50-$7/b for deals done in late October.

Russian ESPO cargoes for January loading were heard offered at ICE Brent plus $1.20-$1.50/b on a DES Shandong basis, up from around $1/b for those December cargoes, they said.

In addition to geopolitics issues, the rising number of buyers from the independent sector has pushed up prices of the sanction barrels, with two private mega refineries emerging in the Iranian crude market and the greenfield Yulong Petrochemical gaining pace in Russian crude buying, market sources said.

"It's much easier to open L/C for those WAF crudes, compared to issuing that for Russian crude cargoes, regardless of the Iranian ones," the trade source said.

However, some market sources doubted if there is a wave of procurements for WAF crudes from the independent sector.

"Obviously, Iranian crudes remain cheaper, and the prices may fall when buying slows down," a second Shandong-based trader said.

Some trade sources speculated that the buyer of the WAF crudes would just resell the barrels if the cargo failed to make a profit.

Data from OilChem showed that the average refining margin for processing imported crudes at small refineries in Shandong fell by 11.6% from a week earlier to Yuan 217/mt ($4/b) as of Nov. 7