China’s COVID lockdowns dent oil demand, independent refiners resell crude

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Anti-COVID lockdowns have dampened consumption of transportation fuels in China to a point where some independent refiners have resorted to trying to resell crude purchased for delivery over the next two months, traders and analysts said.

While other nations ease restrictions as they rebound from the pandemic, China has adhered to a ‘zero COVID-19″ policy, imposing strict restrictions to stop the virus from spreading, although its caseload is modest by global standards.

The current lockdowns in Shanghai, China’s most populous city with 26 million people, and the northeastern province of Jilin have reduced demand in the world’s No. 2 oil consumer and largest crude importer, putting downward pressure on global oil prices that had surged after Russia invaded Ukraine. 

A phased, two-week long lockdown began in the eastern half of Shanghai on March 27 and will switch to the western half on April 1. Fuel demand could drop by 200,000 barrels per day during the lockdown, Rystad Energy’s analyst Claudio Galimberti estimated in a note.

That has put further pressure on independent refiners, also known as “teapots”, which account for a fifth of China’s crude imports. They are already struggling with poor margins as Chinese retail fuel prices have lagged the steep rise in global crude prices LCOc1 that followed Moscow’s “special military operation” in Ukraine.

As a result the independent refiners are expected to lower run rates, and some are trying to resell European, West African and Brazilian crude due to arrive in China over the next two months, traders said.

“China’s demand is pretty slow due to Omicron,” a trader said, adding that teapots were trying to resell cargoes purchased for delivery between late March and May.

However, buyers for these cargoes are limited to state refiners due to destination restrictions – China only – making it difficult for teapots to resell for a profit, traders said.

The teapots, mostly located in eastern Shandong province, typically buy the North Sea crudes Forties and Johan Sverdrup, Africa’s Angolan and Congolese grades, and Brazil’s Tupi crude.


Gasoline consumption has clearly been hit by the lockdown in Shanghai, which according to London-based consultancy Energy Aspects, accounts for 3.6% of China’s consumption of the motor fuel.

Shanghai’s lockdown has also crimped jet fuel demand, though there are other factors at play in the aviation sector, including an air disaster last week that was China’s worst in 28 years. 

Passenger numbers fell sharply last week as the COVID scare in Shanghai grew, according to aviation data provider OAG.

“A rise in COVID-19 cases in Shanghai has seen the city enter a new period of lockdown resulting in the removal of over 1.1 million seats from the Chinese domestic market (in the week to March 28),” OAG said in a statement.

Overseas air travel has also fallen, due in part to tighter COVID testing requirements for passengers arriving from overseas.

China’s aviation fuel sales for international flights in April was expected to be 20% lower than in March, said a source with direct knowledge of the matter.

“A recovery in international flight numbers could be delayed until Q4 22,” said Liu Yuntao, an analyst at Energy Aspects.

Energy Aspects has twice lowered its forecasts for second quarter demand for gasoline and jet fuel, reducing them by 131,000 bpd and 155,000 bpd respectively.

via Reuters

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