By May 13, 2016 Read More →

Russian ESPO crude falls out of favour with China teapot refiners

Russian ESPO crude has excess of naphtha


Russian ESPO

Chinese independent refiners have switched from Russian ESPO crude to oil from Africa and Latin America as the refineries found the crude to be too light.

By Florence Tan

SINGAPORE, May 13 (Reuters) – China’s independent refiners have switched to buying more oil from Africa and Latin America instead of large volumes of Russian ESPO crude as they have struggled to cope with the excess light fuels that come with processing the grade.

The change in preference shows the transient nature of crude purchases from the new Chinese buyers, also known as teapots, who are still trying out different crude grades to identify suitable types for their refineries.

The teapots’ tapering demand for the Russian grade pushed spot premiums for June-loading cargoes to as low as $2 a barrel from as high as $5.60 a barrel for April loaders, catching some traders who sell to teapots off guard.

Lured by the short shipping distance and six-year low crude prices, teapots paid strong premiums to secure Russian ESPO oil in the first quarter.

Spurred by the strong teapot demand, Russia overtook Saudi Arabia as the biggest crude exporter to China for four months in late 2015 and again in March.

Nearly half of the Russian ESPO exports landed at the port of Shandong, where most of the teapots are located, each month between February and April, data from Reuters Trade Flows showed.

But Shandong’s imports may fall in the coming months as some refiners found the crude too light, several trade sources said. High crude inventories and large supplies waiting to offload at congested ports also reduced teapots’ appetite for ESPO, they said.

“ESPO produces too much naphtha. The oil wasn’t economical to us as the ship size was too small and premium was high,” a trader from one of the teapot refiners said.

The independent refiners, which had relied on residual fuel as a feedstock before Beijing opened up crude imports last year, were mostly designed to maximise production of middle distillates such as diesel and jet fuel instead of light products like naphtha and gasoline.

ESPO has an API gravity of 35.57 degrees, much lighter than Oman oil, a favourite among teapots. Refiners would typically draw about 20 percent of naphtha from a barrel of ESPO after processing versus about 15 percent from an Oman barrel.

The naphtha cannot be processed further at teapots’ facilities, four sources said. A consumption tax of 40 yuan ($6.16) per tonne for selling the naphtha as a petrochemical feedstock has deterred the teapots from selling the fuel, sources said.

Still, the teapots’ ESPO demand may improve as several of them are building new units to further process the naphtha, including the largest, Shandong Dongming Petrochemical, the sources said.

Dongming will complete a 24,000 barrels-per-day reformer at its Lianyungang refinery in eastern Jiangsu province by the end of 2016 that will process the naphtha to produce aromatics forgasoline blending or domestic sales, sources close to the matter said. Qirun Chemical Industries Co will also bring online a new reformer next year, a company official said.

In the meantime, teapots are seeking alternatives, with West African crude arrivals to Shandong rising 35 percent in April from December and deliveries from South America increasing 50 percent over the same time frame, Reuters Trade Flows data showed.

($1 = 6.4910 Chinese yuan)

(Reporting by Florence Tan; Editing by Christian Schmollinger)

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