May 12, 2026 [Oil Price]- Some independent refiners in China are reducing their production rates as margins shrink and demand weakens amid the continued paralysis of tanker traffic in the Strait of Hormuz.

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.

Earlier in the war, Chinese authorities reportedly 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.

Yet it appears that 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 neighbours thanks to a stockpile of an estimated billion barrels that has been accumulated over the past couple of years. Yet 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.