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Chinese Oil Futures Rally On Saudi Attacks

Hengli refinery

The prices of China’s crude futures and refined oil surged on Monday as Chinese independent refiners are grappling with rising costs as a direct result of Saturday’s attacks on Saudi oil facilities.

The drone strike on Saudi Arabia’s Abqaiq plant and its Khurais oil field on September 14 led to the shutdown of about 5.7 million barrels/day of oil production, roughly 5% of the world’s daily production, Saudi Aramco said after the attack. The attack sent global oil prices spiking on Monday, and Chinese markets were no exception.

Chinese independent refiners will have to spend more on feedstock as international crude prices rise. If Brent crude futures climb by $5/bbl, the costs of the mainstream imported crude for Chinese independent refiners will go up by CNY280-300/mt ($39.63-42.46/mt), JLC data indicates. The rise may vary for different refiners, but a steep increase seems inevitable.

Rising costs were already reported early on Monday. SC1911, the most-actively-traded crude futures contract on the Shanghai International Energy Exchange (INE) platform, closed at CNY470.3/bbl ($66.56/bbl) at 15:00 on Monday, Beijing time, a jump of CNY28.1/bbl or 6.35% from its last close, INE data shows.

The supply of imported crude to conventional Chinese independent refiners will not be impacted, as most do not import crude from Saudi Arabia, but rather from other countries in the Middle East where prices may also been pushed up by the supply disruption.

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Independent refiners’ margins on Monday shrank by about CNY100/mt from last week, as their feedstock costs rose faster than product prices, JLC data indicates. Gasoline and diesel prices, however, rose by about CNY200/mt and other product prices rose by between CNY100-200/mt on Monday, which softened the drop in refining margins.

The trend in refining margins will strongly depend on whether product prices will catch up with feedstock costs.

Saudi Arabia’s crude oil supply to China’s Hengli Petrochemical and state-owned oil majors will not be affected much in September and October, as Saudi Aramco will prioritize supply under term contracts. The mid-term and long-term impact will depend on when Saudi Arabia resumes full production. The country will try its best to restore most of its crude supply as soon as possible and will also draw down on stocks to ensure supply, market sources said. Saudi Arabia can maintain 15-20 days of normal exports with its stockpiles, even if the 5.7 million bbl/day of lost production isn’t coming back online within the next couple of days.

The supply outage in Saudi Arabia may be offset by increasing supply elsewhere. US President said on September 15 that he was authorizing the release of strategic crude reserves to ensure sufficient supply in the market.

By JLC International

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