As per trade sources and data, China's independent refineries are increasing imports of discounted fuel oil mixed from Russian barrels to use as low-cost feedstock due to a lack of government crude oil import permits for certain of them.
Russian fuel oil barrels have been pushed eastward into Asia at enticing discounts since last year as a result of Western sanctions over Russia's invasion of Ukraine, particularly the impending embargo and price cap on refined products on February 5.
Since the second quarter of 2022, these have been overrunning the ship-to-ship transfer hubs in Malaysia and Fujairah, United Arab Emirates. According to trade sources, traders mix these barrels with other oils to change the fuel oil's nation of origin, allowing for ship insurance and finance that would otherwise be prohibited by the sanctions.
Discounts on these fuel oil cargoes, according to the sources, allow Chinese independent refiners increase profits and substitute crude that certain businesses are unable to acquire without quotas. Additionally, the transaction offers a means of bringing Russian oil to market and bringing much-needed export revenues to Moscow.
"We've been looking at Russian fuel oil since December. It is cheap and does not require (crude) import quotas," said an executive with an independent refiner in eastern Shandong province.
Based on the executive, who declined to be named because he was not authorised to speak to the media, the refiner buys largely straight-run fuel oil to generate diesel and gasoline and has not received any government crude quotas in the last year or so.
For to one source, these blended fuel oil barrels were most recently traded at a $5 discount to the benchmark crude ICE Brent on a delivered Shandong basis.
Since the second quarter of last year, high-sulfur fuel oil values have fallen further in comparison to crude, with cracks reaching historic lows at the end of October.
As per official customs data, China's total fuel oil imports increased to nearly 1.76 million tonnes in December, the highest level since September 2021.
The uptick was driven by a surge in shipments from Malaysia to more than a one-year high at 620,000 tonnes, while monthly imports from UAE rose to 471,000 tonnes, highest in two years.
Meanwhile, direct imports of fuel oil from Russia slipped to 187,000 tonnes in December after peaking at 554,000 tonnes in October, even as total imports from Russia more than doubled year-on-year to 3.1 million tonnes in 2022.