(Bloomberg) -- Russian exports of discounted crude and fuel oil to China have jumped to record levels as the re-opening of the world’s biggest energy importer gathers pace after the dismantling of Covid Zero.
Overall flows last month were at the highest at any point since the invasion of Ukraine a year ago and surpassed a record set in April 2020, according to data intelligence firm Kpler. Exports of fuel oil surged to an all-time high.
The buying spree was likely underpinned by private refiners, but state-owned processors are now showing more interest in Russian crude after concerns around potential blowback from the US and allies kept them on the sidelines.
China is toe-to-toe with India as the biggest buyer of Russian crude after the war in Ukraine re-shaped global energy flows. Moscow has had to offer discounts to entice a shrinking pool of customers, a move welcomed by Asian buyers trying to control inflation. The West wants to deprive the Kremlin of funds for its war but would also like to keep a lid of on global oil prices.
Russia’s overall crude and fuel oil exports to China reached 1.66 million barrels a day last month, according to Kpler data as of Feb. 20. That’s more than the previous record set in April 2020 when the Asian nation was emerging from its initial virus restrictions. Crude and condensate flows rose to 1.52 million barrels a day, just short of a record set almost three years ago.
The uptick in Chinese buying is evidence the country’s economic recovery is picking up, which should help to buoy global oil prices. The International Energy Agency last week cited China for a boost in its demand forecasts, while OPEC producer Iran is tipping Brent to rise above $100 a barrel this year.
It can take more than six weeks for cargoes shipped from Russia’s western ports to arrive in China, while barrels sent from the Far East typically arrive the same month.
Offers for Russian Urals and ESPO crude were pegged at a discount of $13 and $8 a barrel, respectively, to Brent on a delivered basis, according to traders. That’s much cheaper than similar West African grades, which were priced at near parity or a premium to Brent.
Asia’s largest economy has dominated buying of ESPO, a grade that can be shipped quickly from Russia’s Far East, since late-2022. Private refiners have been key consumers, but traders are watching for demand from state-owned refiners such as China Petroleum & Chemical Corp., or Sinopec, as well as CNOOC Ltd.
China not only bought the entire monthly loading schedule of ESPO for January, it also purchased Arctic grades and Urals, said Viktor Katona, lead crude analyst at Kpler. Its buying spree on fuel oil mainly comes from the Black Sea and Baltic Sea regions, he said.
Ship-tracking data indicates that more oil could flow to China from Russia’s western ports of Primorsk and Novorossiysk, where grades including Urals are loaded. The uptick can be partly attributed to state-run refiners speeding up purchases, according to people with knowledge of the matter.
Russian exports of straight-run fuel oil and high-sulfur fuel oil to China hit a record of about 142,000 barrels a day in January, according to Kpler.
Fuel oil can be processed in place of crude in large distillation units, or used in secondary plants such as cokers to make diesel or gasoline. HSFO can also be blended into marine fuel or bitumen. It was at a $16 to $17 a barrel discount to Brent before taxes, the traders said.
China’s private refiners have been buying more straight-run fuel oil since late-2022 due to attractive prices, said Mia Geng, an analyst at industry consultant FGE. Private refiners sometimes opt to refine fuel oil over crude in an effort to skirt government-issued quotas meant to limit crude imports, but the recent surge in purchases was more likely due to processors being able to reap sizable profits from processing, she said.
--With assistance from Kevin Dharmawan.
(Updates with analyst quote in 10th paragraph.)
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