China's Private Refiners Struggle Amid Faltering Economy And High Oil Prices

By Tsvetana Paraskova of OilPrice.com

Many private refiners in China, often referred to as ‘teapots’, have started this year struggling, squeezed between higher prices for importing sanctioned oil and depressed refining margins amid sinking domestic diesel prices in the face of a faltering Chinese economy.

China’s economy has struggled to take off and now the coming Lunar New Year holiday later this month has had operators reduce industrial activity. These factors have led to a collapse in diesel prices in China, and as a result—a crash in diesel refining margins, which have been typically the pillar of profitability for the private Chinese refiners, Bloomberg reports.

The aggregate margin across various fuels of the private refiners has slumped by 50% over the past year. The margin last week fell to its lowest level since early November 2023, per data from Mysteel OilChem cited by Bloomberg.

Diesel prices have slumped to the lowest level in six months, after falling continuously for weeks, according to the data.

The double whammy– falling refining profits combined with higher crude prices – makes the start of the year a difficult one for China’s private refiners.

China’s independent refiners continue to delay purchases of crude from Iran for February as the Islamic Republic is now demanding higher prices and upfront payments before loading the cargoes, trading sources familiar with the matter told Reuters earlier this week.

The stand-off between Iran and the independent Chinese refiners began in the middle of December and has cooled the market for Iranian oil – under U.S. sanctions – with the private buyers in China, which have been Iran’s top customers since the U.S. re-imposed sanctions on Iranian oil in 2018.

Also in view of slowing activity ahead of and during the Lunar New Year for nearly two weeks in February, the private refiners in the Shandong province are expected to have lower refinery run rates this month and next. But they are expected to be able to avoid deep cuts to fuel production, analysts have told Bloomberg.