As the coronavirus continues to take a toll on oil markets, competition is heating up for crude oil suppliers—all of which are vying for a piece of the dwindling oil demand in China and Japan as refineries there cut their run rates.
Crude oil suppliers are now slashing prices for certain grades of crude oil, according to refinery officials and trading managers who spoke to S&P Global Platts. The difference in some cases are multiple dollars per barrel for April loadings compared to March loadings.
China’s Mega Refiners Make Drastic Cuts
Thousands of flights have been cut into and out of China, and travel within certain areas of the country have also been restricted. As a result of these restrictions and on reduced industrial throughput, fuel demand from the otherwise oil-thirsty nation continues to sink.
As China’s demand for fuel wanes, refiners are faced with a grim reality—it might be some time before demand picks back up—so it’s best to settle in and get comfortable. That comfort has come in the form of cutting run rates.
China Petroleum & Chemical Corporation, or Sinopec, Asia’s largest refiner, cut its refinery production by 600,000 barrels per day this month. This is a 12% cut of its 5 million bpd average that it saw in 2019.
PetroChina, China’s second largest refiner, has also cut refinery runs, by 320,000 barrels per day PetroChina has also asked Saudi Arabia, the UAE, and Kuwait about the possibility of deferring its crude oil loadings or reducing volumes. This volume equates to about 10% of its 3.32 bpd of fuel production.
Independent refiners in China are also cutting run rates, with many operating at even less than half capacity. The independents are in the unfortunate position of not being able to export fuels—unlike the state-held refinery giants such as Sinopec and PetroChina. IN Shandong province, independents have said that they have collectively shut in 795,000 bpd of refinery runs, according to S&P Global Platts.
Altogether, IHS Market has estimated that China’s February refinery runs will take a 1.7 million bpd hit—compared to its previous expectation that refinery runs in China would increase by 760,000 bpd.
But the pain extends beyond China. Japan refiners, too, are cutting run rates by between 3-4% from the last week of January to the first week of February.
The Trickle-Down Effect
As these refiners cut back their runs in a big way, naturally they will have a reduced need for crude oil, and suppliers in Brazil, Russia, and Angola are having to adjust to stay at the top of the pile as the Asian refiners look to take less crude.
Brazil’s Lula crude grade, according to Platts, was trading at a $3 premium to dated Brent for April delivery this week, compared to a $4 premium last week—and compared to an $8.50 per barrel premium for March delivery. Related: Asia’s Demand For Middle East Oil Plunges On Coronavirus Outbreak
Angola’s Pazflor grade traded at a premium of just $0.20 to dated Brent for March loading cargo, compared to a $2 premium for February loadings.
One shipment of Russia’s Sokol crude for April 8-14 loading sold at a premium of $4.30 per barrel to Platts Dubai crude, while March loadings were trading at a premium upwards of $8 per barrel. In October, in the wake of the embargo on Chinese tankers, it was trading at a premium of $9.
The number of coronavirus cases had claimed 1,357 lives as of Thursday, with the total number of confirmed cases rising to more than 60,000—with a sharp increase in the number of new cases reported on Wednesday.
Despite the sour note oil prices were trading modestly up on Thursday, even as Russia and OPEC have not yet come to an agreement as to how they will handle the depressed demand.
By Julianne Geiger for Oilprice.com
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