BEIJING (Bloomberg) -- In late February, the tanker Jag Lok loaded oil from Equatorial Guinea in western Africa and set sail for the Chinese port of Qingdao, the gateway to the world’s newest buyers of crude, a journey of more than 12,000 nautical miles.
After reaching its destination in early April, the ship churned in circles for 20 days before it got a chance to deliver its cargo. That’s because the port in Shandong province was struggling to handle a record number of vessels arriving to supply the privately held refineries called “teapots” that dot the region, ship-tracking data compiled by Bloomberg show.
The backup illustrates the challenges facing the independent refiners, which have emerged as a bright spot of rising demand amid a global glut. The processors are forecast by ICIS-China to purchase a combined 1 MMbopd from overseas this year, up from 620,000 bopd in 2015. While small individually, together they account for almost a third of China’s refining capacity. Any curb on imports would threaten oil’s rebound from a 12-year low, according to Nomura Holdings Inc. and Samsung Futures Inc.
“If teapots’ intake of crude slows down, the global oil demand and supply re-balancing might take longer,” said Gordon Kwan, head of Asia oil and gas research at Nomura in Hong Hong. “If demand from teapots is lower, then oil prices might rebound to just $55, instead of $60/bbl next year.”
From being dependent on state-owned energy giants for their feedstock needs as little as a year ago, teapots are now driving Chinese crude purchases after the government allowed them to buy overseas supplies directly. As of end-February, 27 of the companies had received or applied for annual import quotas totaling 89.5 million metric tons, or about 1.8 MMbopd, according to Zhang Liucheng, chairman of the China Petroleum Purchase Federation of Independent Refinery, a group of 16 processors.
Total purchases from overseas into the world’s second-largest oil user climbed to a near record 7.96 MMbopd in April, while shipments to Qingdao surged to unprecedented levels in April.
Still, with infrastructure not developing as fast as oil purchases, imports are at risk of slowing because of the ship traffic and lack of storage capacity, according to BMI Research. Concern about the creditworthiness of companies with no prior experience in international trade is also deterring some sellers. Slowing refining profits mean the plants may have to cut processing rates, weakening their appetite for cargoes from overseas, while the implementation of higher fuel quality standards could force some of them to shut.
Refiner Alliance
To ease purchasing from foreign suppliers, 16 of the refiners banded together in February to form an alliance. Its aim is to better negotiate bulk purchases as the newest buyers in the physical oil-trading market and improve their credibility. Zhang, the chairman, said it seeks term contracts of two to three years.
“When we are dealing with major producers, there is certainly some mistrust in terms of credit lines and unstable demand, which we are seeking to solve,” Zhang said. “Also we could get the cold shoulder because buying volumes can be small.”
The independents’ attractiveness to global producers was highlighted last month when one of the refiners purchased a spot cargo from Saudi Arabia, which broke from its usual policy of selling only under long-term contracts. Yet, they are discovering that it’s not easy to break into the oil market even amid a glut.
“Teapot buying could slow due to logistical constraints which are already stretched to their limits,” said Nevyn Nah, a Singapore-based analyst at consultant firm Energy Aspects Ltd.
Fuel Standards
Apart from the traffic at Qingdao, China’s fight against pollution poses another risk to purchases by teapots. Part of President Xi Jinping’s efforts to tackle the smog that’s shortening lives and has prompted social unrest is a drive to adopt higher fuel-quality standards from January 2017. To comply, the nation’s refineries will need to upgrade with new equipment and technology, which may be beyond the means of some private processors, according to BMI Research, a unit of Fitch Group.
A drop in refining margins amid surging fuel stockpiles and a jump in crude prices this year is another potential dampener. The profit from turning Middle East benchmark Dubai crude into oil products in Asia is at $4.92/bbl as of the end of last week, about 34% lower from late March, data compiled by Bloomberg show.
Brent crude, the benchmark for more than half the world’s oil, traded at $48.17/bbl by 11:26 a.m. in London. Prices have surged more than 70% from a 12-year low they hit in January.
Margin Drop
“Weakening margins are likely to have a stronger impact on independent refineries in China and this will lead to lower crude imports,” said Hong Sung Ki, a senior analyst at Samsung Futures Inc. in Seoul. “That will result in a downward revision for China demand and this will inevitably have a negative impact on oil prices.”
Meanwhile, ships continue to be held up at Qingdao. At least 16 oil tankers with capacity to carry 21.2 MMbbl have stayed near the port for more than 10 days over May 1-23. Half of them were there for more than a month, according to ship-tracking data compiled by Bloomberg.
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