Chinese teapot refiners will likely cut crude processing rates to 50% in April due to rising oil price. ESPO Blend premiums are now $8/barrel over Brent

Independent Chinese refiners are poised to decrease crude processing in April, according to market analysts and traders, driven by escalating prices for sanctioned oil and sluggish domestic fuel demand.

These “teapot” refiners had previously capitalized on affordable Russian and Iranian crude. However, temporary U.S. waivers permitting purchases of stranded Russian and Iranian oil have significantly inflated prices. This surge is fueled by increased demand, notably from Indian refiners seeking to secure supply.

Energy Aspects’ senior analyst Sun Jianan predicts that the run rates for these margin-sensitive teapot refineries will likely drop to approximately 50%, following a recovery to about 55% in February and March.

Traders report that spot premiums for ESPO Blend for April and May shipments have shifted to about $8 per barrel above ICE Brent, reversing a prior discount of about $8 before the U.S.-Israeli tensions with Iran.

The discount on Iranian oil delivered to China for the subsequent two months has narrowed to near or slightly below ICE Brent, compared to a discount exceeding $10 before the conflict’s commencement on February 28.

Due to the disappearance of discounts and soaring Brent crude futures, teapots have postponed crude procurement, with minimal inquiries for April and May deliveries, traders noted.

Independent refiners are expected to reduce production due to shrinking margins, as Beijing maintains capped fuel prices despite escalating crude costs. This decision allows them to assess the market outlook, traders added.

According to a report by Zhang Yuxin, a refined products analyst at Horizon Insights, Shandong’s teapot refineries’ low-cost inventories might last until late April, though those facing financial constraints might be compelled to reduce run rates sooner.

Zhang also highlighted the persistent weakness in fuel demand among end-users amidst elevated prices. China’s National Development and Reform Commission increased maximum retail prices for gasoline and diesel on March 23 by 1,160 yuan ($168) and 1,115 yuan per metric ton, respectively. Despite being the highest increase on record, it still did not match the broader crude price increases.