Demand for imported crude, petroleum bitumen blend and straight-run fuel oil by independent teapot refineries in China's eastern Shandong province was relatively weak over this week, given narrowing refining margins on lower oil prices in the local market.
Gasoline and gasoil sales have slowed due to lower end-user demand this month, and teapot refiners are now faced with rising stocks, sources said.
Still, largest Shandong teapot refiner Dongming Petrochemical is maintaining its pace of crude oil imports, with a 270,000-mt cargo of light crude scheduled for arrival at Rizhao port next week.
This shipment will bring the total volume of crude imported under Dongming's import quota of 6 million mt/year to 3.11 million mt.
The 7.5 million mt/year (150,000 b/d) refinery has early this week, discharged a similar VLCC crude cargo at the same port. The vessel had arrived in end-October but was unable to offload the cargo due to heavy smog and haze at the port area.
Compared with Dongming, the other four Shandong teapot refineries that have recently been granted both import quotas and import licenses for crude are not importing much after receiving their first cargoes.
Lihuayi Petrochemical -- better known as Lijin -- was not heard to have fixed any imported crude cargoes for November delivery so far. Lijin's 3.5 million mt/year refinery is currently undergoing a full turnaround that will last until mid-November, a delay from the earlier scheduled restart in early November.
The 3.5 million mt/year Yatong Petrochemical meanwhile, has planned for one crude import cargo in November, although details were not known.
Shandong's teapot refineries are able to crack crude and fuel oil, but they have been using less imported fuel oil since November 2014 because of relatively high procurement costs.
After the government granted teapot refineries access to imported crude oil, crude has been the top feedstock choice, while bitumen blend is still considered favorable for those that have no access to both domestic and imported crude.
FOUR BITUMEN BLEND CARGOES HEARD FIXED FOR NOV SO FAR
But demand for petroleum bitumen blend from Shandong teapot refiners has continued to weaken this week, as some refineries have shifted to domestic offshore crude supplied by China National Offshore Oil Corp.
So far for November, western traders Vitol and Gunvor will each deliver two cargoes of petroleum bitumen blend into Shandong ports, sources said.
This compares with an estimate 530,000 mt of bitumen blend imports, in five cargoes, into Shandong ports in October, which was lower than September's imports of 1.1 million mt in 12 cargoes.
The steep fall in bitumen blend imports was attributed to more teapot refineries being allowed to import crude, freeing up domestic crude supply to other refiners and displacing the share of bitumen blend in refiners' feedstock mix as a result.
More importantly, tax offices -- under the directive of the Shandong provincial government -- have been conducting close checks on the so-called changing invoices since late October.
Teapot refineries usually import bitumen blend, but invoice them as fuel oil by paying a fee to middlemen. By doing this, refineries using bitumen blend masked as fuel oil do not need to pay the consumption tax on its finished products of gasoline and gasoil.
Before this, Shandong customs officials have been scrutinizing imports of bitumen blend more closely since end-September in a bid to identify misrepresented fuel oil cargoes.
These actions taken by the local government, together with the arrival of some cargoes with higher sulfur content in October, could see some teapot refineries drop the use of bitumen blend, sources said.
Premiums of November-delivery common grade bitumen blend cargoes are now heard at around $20-$25/mt to the Mean of Platts Singapore 380 CST high sulfur fuel oil assessments on a CFR basis, down from from MOPS 380 CST HSFO assessments plus $27-$30/mt, CFR, last heard for October cargoes.
Common grade bitumen blend has a density of 0.98-0.99 kg/l, sulfur content of 2%-3% and carbon residue of 12%-14%.
Teapot refineries in Shandong -- China's main buyers of imported straight-run fuel oil before November 2014 -- have largely switched to comparatively cheaper bitumen blend that does not incur consumption tax and import tariffs.
NO NEW M100 FUEL OIL FIXED BY SHANDONG TEAPOT REFINERS
On Russian M100 fuel oil, no cargoes were heard fixed for November delivery by Shandong teapot refineries.
The last arrival was a combination cargo comprising 35,000 mt of M100 and 55,000 mt of straight-run fuel oil that was delivered to Longkou port last week. The 5.5 million mt/year Hengyuan Petrochemical was the buyer, but the premium level was not known.
M100 fuel oil cargoes for early November delivery were heard talked at premiums of around $50/mt to MOPS 180 CST fuel oil assessments on a CFR basis.
But teapot refiners continued to see the premium levels as too high and very few buyers still require this grade, sources said.
Meanwhile, Russian state-owned Rosneft will likely issue its tender offering term M100 fuel oil for loading over January-December 2016 early next week, sources said.
Rosneft currently has a term contract of up to 2.8 million mt of M100 for loading over January-December 2015 from Nakhodka or Vanino with Mercuria, at a term premium of around $85-$88/mt to MOPS 180 CST HSFO assessment on a FOB basis.
