China’s teapot refiners battle rising costs of imports from Russia, Venezuela

SINGAPORE : Rising costs of crude oil are squeezing profits at China’s independent refineries amid stiff competition for limited Russian supply, while the price of Venezuelan crude gains ground after the U.S. freed up sanctions on its industry.

The refineries, known as teapots, account for about a fifth of shipments into the world’s top crude importer.

They have processed crude for more than a year mainly from Iran, Russia and Venezuela, all facing Western sanctions, to reap savings of billions of dollars from the cheap feedstocks.

Average refining margins at teapots have plunged sharply, to about 450 yuan ($61.50) a tonne in October from a March peak of nearly 1,200 yuan, trade sources said, as global benchmark Brent climbed above $90 a barrel and strong demand for Russian crude pushed ESPO into premiums from discounts.

Russia’s light sweet ESPO crude for December arrival is being offered at a premium of about $1 a barrel to ICE Brent, up from a discount of $7 a barrel at the start of the year, the sources said.

On Wednesday, in the most extensive rollback of Trump-era curbs on Caracas, the Biden administration broadly eased sanctions on Venezuela’s oil sector after the government and opposition parties struck a deal for the 2024 election.

That prompted Venezuela’s state-run oil company PDVSA to contact customers with crude supply contracts, Reuters reported on Thursday citing people familiar with the matter, a sign that supply could be diverted from China.

Chinese teapots have become top buyers of Venezuelan oil since the U.S. imposed sanctions in 2019, importing just over 400,000 barrels per day (bpd).

“We would expect the supply from Venezuela to slide in the coming months as Caracas may prioritise sales to Europe and the U.S., and prioritise big oil firms,” said a China-based source, who spoke on condition of anonymity.

Spot prices for Venezuela’s Merey 16, a high-sulphur heavy crude, soared to a discount of about $31 a barrel to ICE Brent right after the lifting of sanctions, from about $38 a barrel, on a free-on-board (FOB) basis, trade sources said.

Offers for Merey for now held steady at a discount of about $22 a barrel to ICE Brent on a delivered-ex-ship (DES) basis to China as both sellers and buyers stayed on the sidelines, they said.

Since they are cheap, Merey and Venezuela’s Boscan crude are among the feedstocks most commonly used by teapots, especially to produce bitumen. Venezuelan oil is also heavy in quality, allowing imports by refiners free of limited quotas for crude imports.

China’s official data does not show the tally of Venezuelan imports. Most of the oil originated from Venezuela, as well as Iran, is rebranded by traders as crude oil or “other heavy oil” from Malaysia.

On Friday, data from China’s General Administration of Customs showed Malaysian crude arrivals jumped 85 per cent over the first three quarters, while imports of “other heavy oil” reached a record peak of 1 million metric tons (249,244 bpd) in September.

“Merey’s price will certainly rise in China as supply to teapots will get tight but demand remains strong,” said another China-based source, speaking on condition of anonymity.

($1=7.3170 Chinese yuan renminbi)