China Teapot Refiners Cut Operations to Lowest Since 2017

Key facts

• China's independent "teapot" refiners have reduced refinery operations to 50.5% utilization.
• This marks the lowest operational level for these refiners since August 2017.
• Factors contributing to the slump include high feedstock prices and weak domestic fuel consumption.
• Restricted fuel exports by authorities have also impacted refinery margins.
• Crude oil imports into China have fallen to an eight-year low.

China's independent oil refiners, known as "teapots," have drastically cut their operations to their lowest point since 2017, with refinery run rates in Shandong province falling to 50.5% last week. This significant reduction is attributed to a confluence of factors including elevated feedstock prices, diminished domestic fuel consumption, and government restrictions on fuel exports aimed at ensuring sufficient domestic supply amidst geopolitical supply shocks.

The current utilization rates are even lower than those seen during the pandemic in 2020 and approach the lows of 44% recorded in August 2017. Overall Chinese refinery runs in May averaged 66.3%, with total processed volumes down 9.1% year-on-year to 53.72 million tons, reflecting a broader trend of reduced activity. The "teapots," which are key importers of Iranian crude, were already struggling with profitability before recent escalations in the Middle East, and the subsequent surge in crude prices exacerbated their difficulties.

Analysts suggest that a recent drop in oil prices and a U.S. waiver allowing the sale of Iranian crude until August 21 do not guarantee an immediate increase in utilization rates. Stockpiles in Shandong are reportedly above 2025 volumes, and weak Chinese fuel demand persists, partly due to the accelerated shift towards electric vehicles, a trend that gained momentum after oil prices surpassed $100 per barrel during the recent Middle East conflict.