China Oil Teapots Cut Run Rates to Pandemic Levels

Private oil processors in China have slashed their operating rates to levels last seen at the beginning of the pandemic, as US sanctions on Russia cut a key source of crude supply.

Run rates at the so-called teapots of Shandong province edged down this week to just 43.64 percent, according to industry consultancy Mysteel Oilchem. That’s the lowest since March 2020, when the spread of Covid-19 crushed economic activity. 

The teapots clustered on China’s east coast have been hardest hit by Washington’s  yet of measures targeting Russian oil following the invasion of Ukraine. Flows of their favored ESPO grade of crude from the Pacific port of Kozmino have been crippled, forcing them to reduce operations already under pressure from China’s weak economy and lackluster demand for fuels.

The sanctions imposed on Jan. 10 are hurting refiners across Asia. The sudden dearth of Russian oil has spurred a surge in interest in alternatives from Oman and Abu Dhabi, while freight rates have soared. Refineries in Singapore, South Korea and Taiwan are also particularly vulnerable to the rising costs.

Under the dual pressure of escalating costs and a slowing market, the refining margin at Shandong’s teapots fell to a loss of more than 150 yuan ($20.6) a ton in the week to Jan. 23, from a profit of over 300 yuan a ton in the same period last year, according to OilChem. 

Chinese buyers of Russian ESPO are being asked to pay more for cargoes delivered on a non-sanctioned tanker, or take the risk of a blacklisted vessel at a cheaper price. Teapots may cut runs further this month, JLC, another consultancy, said in a  on Thursday. 

Even before the latest US penalties, Chinese ports had become wary of handling sanctioned tankers, forcing vessels carrying Russian grades to idle off the coast.