Chinese small and medium-sized refineries, known as teapots, are turning to oil from Canada, Congo, and Brazil as their access to low-cost crude from Iran and Venezuela has been blocked. This shift is driving up oil prices in those regions.
According to Bloomberg, Chinese teapot refineries have increased their purchases of oil from Africa, Canada, and South America due to disruptions in the Strait of Hormuz and U.S. sanctions that have hindered their ability to buy Iranian oil. Local oil traders reported that this week, Congolese Djeno crude was trading at a premium of up to $20 per barrel over Brent crude for Chinese buyers, a significant increase from a $15 premium just weeks ago. In recent weeks, Chinese teapots have also purchased large quantities of oil from Canada, Brazil, and Argentina, which has contributed to rising prices for Russian ESPO crude.
The driving force behind the rising oil prices is the small and medium-sized teapot refineries concentrated in Shandong province. Unlike major state-owned refineries such as Sinopec and PetroChina, these teapots do not enter into long-term oil supply contracts and do not own stakes in overseas oil fields. They have relied on purchasing Iranian and Venezuelan crude on the spot market, refining it, and selling it. With these channels now blocked, they are seeking alternatives by buying oil from Africa and South America on the spot market.
The reason these refineries are willing to pay a premium for more expensive oil is that securing crude is a priority. It is more beneficial for them to maintain operational rates, even if it means paying higher prices for oil, rather than leaving their refining facilities idle. Additionally, recent refining margins have surged from around $10 per barrel before the war to approximately $20, supporting their purchasing decisions. If the increase in oil premiums is outpaced by the rise in prices for refined products like gasoline and diesel, their profit margins could actually improve despite the higher crude costs.
While teapot purchases are expanding, China's overall crude oil imports remain below pre-war levels. As of the end of last month, China's daily crude oil imports were estimated at 10 million barrels, down from about 12 million barrels before the war. This decline is attributed to a structural decrease in gasoline and diesel demand due to the increased adoption of electric vehicles, along with a phase of inventory depletion as they utilize previously accumulated commercial and strategic reserves.
* This article has been translated by AI.
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