Tight China crude import quotas prompt residual imports

Residual feedstock enquiries from China are expected to rise or stay firm in the coming months, as many Chinese independent refiners seek alternative supplies after maximising their crude import quotas for delivery between July and September.

Many Shandong independent refiners used up their first two batches of crude quotas for delivery during July-September. Quotas were also used up quickly during May for June-July delivery cargoes to take advantage of lower crude prices during these months. Dated Brent crude values during June averaged 40.62/bl, up from the May average of $32.14/bl.

China's crude runs in July were 14.03mn b/d, a slight dip from 14.08mn b/d in June. But the July crude runs were 12.4pc higher than the same month last year. The elevated crude runs during June and July were also in line with residual feedstock imports during the same period.

Chinese independent refiners have sought feedstock alternatives like residual feedstock because of the lack of enough crude import quotas since June. This firm appetite for residual feedstock will likely continue as long as the economics to keep runs high make sense.

Residual feedstock like diluted bitumen and straight-run fuel oil (SRFO) are commonly imported by Chinese independent refiners for further processing.

Pacific Commerce, the trading arm of independent refiner Dongming Petrochemical, during July bought two aframaxes of SRFO from Malaysian state-owned Petronas' trading arm Petco. The cargoes originated from Malaysia's Pengerang refining complex. The cargoes were awarded to Dongming for delivery between July and August.

Enquiries for diluted bitumen as a residual feedstock were also on the rise because of the limited supplies of SRFO in Asia-Pacific. Chinese independent refiners are likely to opt for diluted bitumen instead, as the import of SRFO or residual feedstock of any kind is subject to fuel oil's 1,425 yuan/t ($32/bl) consumption and value-added tax and surcharges. There are no such charges for importing diluted bitumen.

China during July imported about 2.307mn t of diluted bitumen, a sharp increase of 56.7pc from the previous month's 1.472mn t. Diluted bitumen imports to China rose by 118pc from the same month last year. China during January-July this year imported an average of 906,936 t/month of diluted bitumen compared with an average of 134,466t for the same period last year.

Diluted bitumen is a mixture of crude, bitumen and other components such as fuel oil. The product has a higher clean oil product yield than fuel oil. Demand for such residual feedstock fell drastically after Beijing liberalised crude imports in 2015.