China increases its purchases of Russian crude oil at bargain prices

According to oil traders and shipping data, China is quietly increasing its purchases of Russian oil at bargain prices. This is in response to Western buyers quitting Russia’s business after the invasion of Ukraine in February.

This move by the largest oil importer in the world comes one month after it had cut back on Russian supplies. It was afraid of openly supporting Moscow and possibly exposing its state oil giants to sanctions.

According to Vortexa Analytics, China’s seaborne Russian oil imports from Russia will rise to near-record levels of 1.1 million barrels per daily (bpd), in May. This is up from 750,000 BPD in the first quarter, and 800,000. BPD in 2021.

Unipec, Asia’s largest refiner Sinopec Corp’s trading arm, is leading the purchase, alongside Zhenhua Oil (a unit of China’s defense conglomerate Norinco), according to shipping data and a report by Reuters and five traders. The traders also reported that Livna Shipping Ltd (a Hong Kong-registered company) has recently emerged as a major seller of Russian oil to China.

Sinopec declined to comment. Requests for comment from Zhenhua or Livna were not answered.

These firms will fill the gap left by western buyers following Russia’s invasion of Ukraine. Russia called it a “specially military operation”.

Shortly after the invasion, the United States, Britain, and other key oil buyers had banned Russian oil imports. The European Union is completing a new round of sanctions. This includes a ban on Russian oil purchases. Fearing that they might be subject to sanctions or draw negative publicity, many European refiners have stopped buying oil from Russia.

Vitol, Trafigura and other major commodity traders around the globe stopped buying from Rosneft. This was in response to an EU rule that on May 15 prohibited purchases of oil products from Russia.

One Chinese trader told Reuters that the situation took a dramatic turn following the exits of Vitol, Trafigura and that this vacuum could only be filled with companies that can deliver value and be trusted by their Russian counterparts.

Spot differentials for Russia’s oil are approximately $29 lower than before the invasion. This is a boon to China’s oil refiners, who face shrinking margins and a slowing economy. This price is significantly lower than the prices of comparable barrels from the Middle East and Africa, Europe, and the United States.

China receives 800,000 barrels per day of Russian oil through pipelines that are part of government agreements. This would increase China’s May oil imports to almost 2 million barrels per day, or 15% of its total demand. Russia’s oil sales help to offset the economic damage from sanctions.

STATE BUYERS

China’s state-owned companies, led in part by Sinopec, Zhenhua and Zhenhua are expected to purchase two-thirds of Russia’s Far Eastern export-grade ESPO blend in May. This is an increase from the one-third before the invasion of Ukraine. Reuters was told by traders who closely track the flow of oil flows. Russia exported approximately 24 million barrels in May. This is 6% more than April.

Three traders stated that Sinopec alone will likely buy at least 10 ESPO shipments by May, more than double its volume prior to the invasion. Some of the trades reached a record $20 a barrel discount below the benchmark Dubai crude oil on an FOB Kozmino basis.

Sinopec, Zhenhua, and Livna are moving oil more from Russia’s Baltic Sea ports in northern Europe and its Far East export hub Kozmino.

According to shipping data and traders who are familiar with the matter, Zhenhua is the smallest state-owned Chinese oil trading company. North Petroleum International Co, a Zhenhua unit, loaded two ESPO shipments in early May and two additional cargoes with the Urals from Baltic Seaport Ust-Luga in late April and mid-May according to data from Vortexa and Refinitiv, a shipbroker report, and traders.

Norinco is one of the largest defense contractors in the world. In 1990, Norinco won a concession to oil production in Iraq. Zhenhua, it is a trading vehicle, has recently expanded to include trading and terminal investment in gas.

Zhenhua purchased some of its Russian oil supply via Paramount Energy in Switzerland. Paramount Energy is a trader that specializes in selling oil from independent Russian and Kazakhstan producers to private end-users. Two traders who are familiar with the matter confirmed this.

Paramount Energy has been a regular marketer for ESPO to China’s independent refiners, since 2016, and Paramount Energy increased its China business by increasing sales to Zhenhua in 2020 after opening a Beijing office.

Paramount Energy refused to answer Reuters’ questions about trades that took place after Russia invaded Ukraine. Paramount Energy stated that it has customers in China for ESPO crude cargoes, which were delivered under long-term contracts signed before February 24, the date of the invasion. This crude is only supplied by non-state oil companies and independent oil producers, as it has been our policy for a long time.

Livna has loaded more than 7 million barrels of the Russian Urals and ESPO crude oil bound for China since April, according to ship-tracking data provided by Vortexa and Refinitiv.

According to shipping data, Livna was previously a regular shipper for Russia’s Europe-focused export-grade Urals within Europe. In early 2020, Livna began sending Russian oil to Shandong, China’s independent refiner’s hub.

Livna loaded eight cargoes in May. This is nearly 6 million barrels of ESPO crude oil. This is an increase from one to two cargoes per month in the previous year, according to shipping data. According to traders, Livna also loaded at most two Urals shipments into Baltic ports in May for shipment to China.

Reuters was told by traders that the withdrawal of western traders attracted Shandong Port International Trade Group as a new player. This is a provincial-backed trader who has been trading in the region.


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