March 11, 2022 [Energy Intelligence] – Some of China’s biggest market players have distanced themselves from Russian crude as the war in Ukraine gives buyers in Europe and Asia pause.

Even China’s independent refiners, who had snapped up some of Russia’s Espo crude soon after the invasion started, appear to be holding back from additional purchases — at least for now.

With Indian refiner Indian Oil Corp. appearing to rule out further purchases of Russian crude in a recent tender, China had been seen as Russia’s best hope for maintaining sales of its crude into Asia.

But now, even Chinese demand appears to be faltering — at least temporarily — amid heightened risks and uncertainties as the US, EU and others slap sanctions on Russia that have included measures targeting banks and shipping.

It’s also possible that buyers are holding back in the belief that spot price differentials for Russian crude will weaken further over time.

Four China-focused market sources said Russian sellers may ultimately have to persuade buyers to pay upfront, or to offer open credit — a tactic that Iran has used in the past to boost demand for its sanctioned crude.

One of those sources was “surprised” that Russian sellers have not yet offered open credit, given the long-standing relationships that most Chinese buyers of Espo have with Russian suppliers.

The Espo crude grade takes its name from the East Siberia-Pacific Ocean pipeline that transports oil to the Kozmino export terminal near Vladivostok in Russia’s Far East. China typically accounts for most of the demand for Espo.

Chinese NOCs Hold Back

Four market sources, including three focused on China, said that Chinese national oil companies (NOCs) appear to have backed away from purchases of Russian crude in both Europe and Asia.

That includes Unipec, the trading arm of China’s largest refiner Sinopec, which is a major player in global crude markets.

“They don’t want to touch” Russian crudes like Urals and Espo, said a Chinese market source, adding that this has sent a “very clear message to the whole market.”

Urals is Russia’s main export grade in the European market and an important feedstock for the region’s refiners. Some is also shipped further afield.

A European trader agreed, saying that Unipec was not currently saying a “direct no” to offers of Russian crude, but was saying “not at the moment.” He called it “a very strong, symbolic” message.

Chinese NOCs appear to be trying to determine to what extent they will remain engaged with the current chaotic spot market for Russian crude, said two market sources focused on China.

Unless there is a “clear signal” from the Chinese government, the NOCs are likely to keep holding back, they added.

Alternatively, the NOCs could be waiting for the market to settle down, and perhaps wait for Saudi Arabia to announce its latest official selling prices before turning their attention to Russian crude, said two China-focused trading sources.

Espo Premium Crumbles

After Russia recognized two breakaway republics in Ukraine and Germany suspended certification of the Nord Stream 2 gas pipeline on Feb. 22, the premium for April cargoes of Espo fell to around $6.20/bbl over the Dubai benchmark price.

Several days earlier, Espo had been trading at a premium of $7.25/bbl.

Since then, the Espo market has “cratered,” said a trader who markets crude to independent Chinese refineries.

An April-loading cargo was sold at around $3.00/bbl over Dubai recently, with offers also around that level, said three market sources.

The swift fall in the premium is due to the potential risks and problems surrounding Russian crude, which have led to caution among Chinese independent refiners, market sources said.

Traders are believed to still be holding April cargoes of Espo and Sokol (a Russian Far East crude), said a trading source. They have been scrambling to resell them while offering alternative financing.

But some independents believe that Espo differentials will go “much lower,” said a Chinese market source, adding that they have started to “dream” about the deep discounts paid by buyers of sanctioned Iranian crude.

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