China has focused on controlling crude oil costs due to a shift in refinery strategies. This change has become more pronounced following the lifting of fuel export restrictions in late June by Beijing, especially for state-owned oil companies that still have significant fuel export quotas.
Return to Middle Eastern crude oil sourcing
China is paying more attention to sourcing crude oil from the Middle East, particularly from Saudi Arabia and Iraq. According to reliable sources, in August, China returned to cargoes related to Hormuz and relied more on FOB (Free on Board) cargoes that were delivered from STS (Ship-to-Ship) areas in the eastern Hormuz. In that month, Chinese buyers rejected offers from Yanbu or Sidra Carrier that came with a minimum travel time of 30 days via Cape of Good Hope. Instead, they purchased FOB cargoes from STS areas in Oman, which limited the travel time to about 20 days.
Read more: Saudi Arabia's retreat from delivering oil to European refineries
Increase in Iraqi crude oil purchases
China has also increasingly turned to Iraqi crude oil since August. Several major Chinese oil companies have received cargoes related to their upstream investments, while a broader group of refineries attracted spot cargoes from Basra via STS loadings in eastern Hormuz in September. Of the approximately 4.7 million barrels of crude oil transferred via STS operations in eastern Hormuz from August to date, Chinese refineries have accounted for at least 50% of this volume.
In addition to Middle Eastern crude oil, Chinese refineries are also competing with Indian buyers for Russian seaborne crude oil and have secured nearly all cargoes from the eastern phase and western cargoes of Russia that are shipped via the Northern Sea Route. This approach allows Chinese refineries to reduce the average travel distance of their crude oil, especially as disruptions related to Hormuz force other Asian buyers to turn to new sources.
Impact on the Asian oil market
In the context of record transportation costs, shorter crude oil journeys can significantly reduce feedstock procurement costs and enable refineries to respond more quickly to changes in market conditions. This provides a significant advantage for Chinese refineries, especially as refining margins in Asia remain high.
Forecasts indicate that the inflow of Chinese seaborne crude oil in September and October will continue its upward trend, although it remains below seasonal levels. With about 8 million barrels expected to arrive in the absence of further disruptions, refineries still have sufficient onshore crude oil reserves to utilize in case of disruptions in seaborne supply.
Export outlook for the fourth quarter
The fourth quarter outlook remains fraught with significant uncertainty, with high crude oil prices, firmer fundamentals, and elevated transportation costs potentially impacting refining economics. However, if product prices continue to trend upward and refining margins remain positive, Chinese refineries may still utilize their remaining annual fuel export quotas. This could alter China's role in balancing the regional oil market and help alleviate pressure on crude oil prices.
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