Russian Oil Flows to China Reach Highest Level Since Invasion of Ukraine

(Bloomberg) — Russian exports of discounted crude oil and fuel oil to China jumped to record levels as the world’s biggest energy importer gains momentum after Covid Zero is dismantled.

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Last month’s total flows were the highest since the Ukraine invasion a year ago, according to analytics firm Kpler, surpassing the record set in April 2020. Exports of fuel oil rose to a record high.

The buying spree was likely supported by private refineries, but state-owned refiners are now showing more interest in Russian oil after fears of possible negative impact from the US and its allies kept them out.

China goes hand in hand with India as the biggest buyer of Russian oil after the war in Ukraine changed global energy flows. Moscow has been forced to offer discounts to attract a dwindling circle of shoppers, and Asian shoppers trying to keep inflation in check have welcomed the move. The West wants to deprive the Kremlin of funds for its war, but would also like to keep world oil prices under control.

As of Feb. 20, total oil and fuel oil exports from Russia to China reached 1.66 million barrels per day last month, according to Kpler data. This is more than the previous record set in April 2020, when the Asian country was emerging from its initial virus-related restrictions. Flows of crude oil and condensate rose to 1.52 million barrels per day, just short of the record set nearly three years ago.

The growth of Chinese purchases indicates that the recovery of the country’s economy is accelerating, which should help support world oil prices. The International Energy Agency last week mentioned rising demand in China, while Iran, an OPEC producer, forecasts Brent crude to top $100 a barrel this year.

It can take more than six weeks for shipments from Russia’s western ports to China, while barrels shipped from the Far East usually arrive the same month.

According to traders, offers for Russian Urals and ESPO oil were pegged to Brent at a discount of $13 and $8 per barrel, respectively. This is much cheaper than similar brands from West Africa, which were priced at near parity or at a premium to Brent.

Since the end of 2022, Asia’s largest economy has dominated purchases of ESPO, a variety that can be quickly delivered from the Russian Far East. Private refiners have been key consumers, but traders are keeping an eye on demand from state-owned refiners such as China Petroleum & Chemical Corp. or Sinopec, as well as CNOOC Ltd.

China not only bought the entire monthly ESPO loading schedule for January, but also bought Arctic grades and Urals oil, said Victor Katona, a senior analyst at Kpler. According to him, the increase in fuel oil purchases mainly comes from the regions of the Black and Baltic Seas.

Vessel-tracking data suggests China could be getting more oil from Russia’s western ports of Primorsk and Novorossiysk, where grades are shipped, including Urals grades. The rise may be partly due to government refineries speeding up purchases, people with knowledge of the matter said.

Russian exports of straight-run and high-sulphur fuel oil to China hit a record high of about 142,000 barrels per day in January, according to Kpler.

Fuel oil can be processed instead of crude oil in large distillation plants or used in secondary plants such as coke ovens to produce diesel or gasoline. HSFO can also be blended with marine fuel or bitumen. Traders said this was at a discount of $16 to $17 a barrel against pre-tax Brent.

China’s private refineries have been buying more straight-run fuel oil since the end of 2022 due to attractive prices, says Mia Geng, an analyst at industry consultant FGE. Private refiners sometimes choose to refine fuel oil rather than crude oil to circumvent government-imposed quotas designed to restrict imports of crude oil, she said, but the recent surge in purchases was likely because refiners were able to make significant profits from refining. .

–With assistance from Kevin Dharmawan.

(Updates with analyst quote in 10th paragraph.)

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