(Bloomberg) -- Asian oil refiners — from Chinese teapots to processors in Singapore and South Korea — are either cutting run rates or considering it as the impact of US sanctions on Russia ripple through the market.
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Independent Chinese refiners in Shandong province are the hardest-hit after Washington’s strictest package of measures targeting Moscow crippled flows of their favored ESPO grade from the Pacific port of Kozmino. In other parts of Asia, so-called merchant processors, which are more dependent on fuel exports due to their small domestic markets, are also looking to cut activity as physical crude and freight costs soar.
“A feedstock shortage, coupled with higher costs for alternative crude, has prompted many independent refineries to trim runs by 10% to 20%,” said Mia Geng, an analyst at industry consultant FGE, referring to the Chinese teapots. The situation will likely get worse in February, she said.
The impact of the Jan. 10 sanctions is hitting Asian refiners on multiple fronts. The sudden dearth of Russian oil has spurred a surge in alternatives like Oman crude and Abu Dhabi’s Murban, the most-referenced Middle Eastern grades, while freight rates have also soared. Merchant refiners — most of which are in Singapore, South Korea and Taiwan — are, after the teapots, the most vulnerable to the rising costs.
These processors typically rely on Saudi Arabian oil, priced against benchmarks such as Oman, for their baseload supply, as well as spot purchases from the Middle East and elsewhere.
This has pushed up feedstock costs for processors and eroded margins, which have even gone negative, the traders said. Some of the merchant processors have temporarily halted their purchases of additional spot cargoes and are considering run cuts or temporary closures, they said.
Merchant refiner margins have dropped from between $2 and $3 a barrel to a small loss, the traders said. Gross refining margins in Singapore, a benchmark for Asia, fell to minus 65 cents this week from as high as $3.75 earlier this month, S&P Global Commodity Insights data show.
Middle Eastern crudes have seen the biggest price jumps so far as they’re the go-to grades for Chinese and Indian buyers trying to make up for lost Russian flows. Demand for shipments from the Atlantic Basin has also been supported.