Low-priced Russian oil boosts profits of China's independent refiners

A view shows cargo vessels in Nakhodka Bay
A view shows cargo vessels in Nakhodka Bay near the port city of Nakhodka, Russia, December 4, 2022. REUTERS/Tatiana Meel/File Photo

SINGAPORE, Dec 20 (Reuters) - China's independent refiners are boosting their profits from processing low-priced Russian oil as western sanctions on Moscow give them leverage to negotiate for steeper discounts, industry sources and analysts said.

The Group of Seven (G7) nations introduced a ceiling price of $60 a barrel for Russian oil from Dec. 5 and the European Union banned Russian seaborne imports to limit Moscow's ability to finance its war in Ukraine.

That has prompted Russia to divert its West-bound crude to Asia at steeper discounts.

While India is snapping up Russian Urals crude at under $60 a barrel, China is still buying ESPO crude above the price cap because independent refiners, mainly located in the eastern province of Shandong, are attracted to the oil's short shipping distance and low-sulphur quality, traders said.

Also, there is no replacement for similar quality oil to Russian ESPO crude at low prices, they said.

Spot discounts for ESPO crude have widened with at least one January-arrival ESPO cargo sold to an independent refiner last week at a discount of around $6.50 per barrel against the March ICE Brent price on a delivery-ex-ship (DES) basis, according to two traders with knowledge of the deal. The sources declined to be named as they are not authorised to speak to media.

Other cargoes for the same delivery month had traded at around a discount of about $5 a barrel, widening from a discount of $4 in the prior week, they said.

As most Chinese refiners will soon wrap up purchases of crude to be delivered ahead of the Lunar New Year on Jan. 20, ESPO sellers are also keen to clear cargoes on hand even at slightly lower prices, said a Shandong-based oil trading source.

"Chinese buyers are bidding at lower prices as they now have bigger leverage on price negotiation," the person said.

The ESPO crude price on a free-on-board basis is around $65 a barrel, above the G7 price cap, traders estimated.

Access to the low-cost oil boosted refining margins at Shandong plants to above 800 yuan ($114.59) a tonne last week, up from below 600 yuan a tonne in early December, a China-based oil analyst estimated. Independent refiners mostly process Russian crude and other sanctioned oil from Iran and Venezuela.

($1 = 6.9815 yuan)

Reporting by Muyu Xu; Editing by Florence Tan and Christian Schmollinger and Jacqueline Wong

Our Standards: The Thomson Reuters Trust Principles.