China’s Teapot Refiners Slash Output As Hormuz Crisis Crushes Margins

Confirming our report from last Friday, Reuters reports that some independent refiners in China (also known as “teapots”) are slashing their production rates as margins plummet to unprecedented negative levels, and demand weakens amid the continued paralysis of tanker traffic in the Strait of Hormuz.

China refiner margins (when Beijing tells you you can’t raise prices, you don’t raise prices). pic.twitter.com/DzZQoXqs5a

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Citing unnamed trade and industry sources, Reuters reported today that the average operating rates at so-called teapots in Shandong had fallen to 50%, from 55% in April. What’s more, the operating rates of independent refiners are likely to fall further as the war drags on, and refiners swing into losses that the Reuters sources estimate at between $74 and $88 per ton of processed crude oil.

As a reminder, on Friday we reported that Chinese authorities ordered private refiners to maintain high levels of gasoline and diesel supply, even at a loss, or risk their crude import quotas being slashed if they reduce run rates. If the private refiners move to cut processing rates to preserve margins amid soaring crude prices, they would see their import quotas – handed out by the government in quarterly or semi-annual installments – reduced in the coming years, the officials warned. Instead, they appear to have aggressively reduced their import demands, leading to a big drop in Chinese oil imports.

Reuters confirms that it now appears teapots have run out of options and are risking lower quotas to manage their losses. “Without cutting output, the losses are unbearable,” one of the Reuters sources said.

Asia, the biggest oil demand center globally, is facing the greatest pain from the closure of the Strait of Hormuz. Overall, the war could force up to 6 million bpd cuts to crude runs across Asia in April, as refineries face severe supply disruption with 65% dependency on Middle East crude.

China is better insulated than its neighbous thanks to a stockpile of an estimated 1.4 billion barrels that has been accumulated over the past couple of years. Yet as OilPrice notes, this supply cushion is limited, so China is doing a fine balancing act of keeping the domestic market well supplied to avoid sharp price spikes, especially since China’s economy is increasingly dependent on the well-being of its Pacific rim neighbors (and trading partners) who are far less insulated from surging oil prices.