Russian oil flows to China hit highest level since invasion of Ukraine

(Bloomberg) – Russian exports of discounted crude and heating oil to China have surged to record levels as the reopening of the world’s largest energy importer gathers momentum following Covid Zero dismantling.

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Total flows last month were at their highest level since the invasion of Ukraine a year ago, surpassing a record set in April 2020, according to data intelligence firm Kpler. Exports of heating oil rose to an all-time high.

The buying spree was likely helped by private refiners, but state processors are now showing more interest in Russian crude after concerns about a possible backlash from the US and allies kept them on the sidelines.

China is neck and neck with India as the largest buyer of Russian crude after the war in Ukraine reshaped global energy flows. Moscow has had to offer discounts to attract a shrinking clientele, a move welcomed by Asian shoppers trying to control inflation. The West wants to withdraw funds from the Kremlin for its war, but it also wants to keep global oil prices in check.

According to Kpler data on Feb. 20, Russia’s total crude and fuel oil exports to China reached 1.66 million barrels a day last month. That’s more than the previous record, set in April 2020 as the Asian nation recovered from its initial virus restrictions. Crude oil and condensate flows rose to 1.52 million barrels per day, just below a record set nearly three years ago.

The surge in Chinese buying is evidence that the country’s economic recovery is accelerating, which should help support global oil prices. The International Energy Agency last week cited China for an increase in its demand forecasts, while OPEC producer Iran bets Brent will surge above $100 a barrel this year.

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It can take more than six weeks for cargo from Russia’s western ports to arrive in China, while barrels from the Far East usually arrive in the same month.

According to traders, bids for Russian Ural and ESPO crude were tied to Brent on a delivered basis at a discount of $13 and $8 per barrel, respectively. This is much cheaper than similar West African grades, which were priced close to or higher than Brent.

Since late 2022, Asia’s largest economy has dominated purchases of ESPO, a variety that can be shipped quickly from Russia’s Far East. Private refiners have been major consumers, but traders are watching demand from state-owned refiners like China Petroleum & Chemical Corp. or Sinopec and CNOOC Ltd.

China not only bought ESPO’s entire monthly load plan for January, but also Arctic grades and Urals, said Viktor Katona, senior crude oil analyst at Kpler. His fuel oil buying spree comes mainly from the Black Sea and Baltic Sea regions, he said.

Ship-tracking data suggests more oil could flow into China from Russia’s western ports of Primorsk and Novorossiysk, where grades including the Urals are loaded. The surge is partly due to state-run refiners accelerating purchases, according to people familiar with the matter.

According to Kpler, Russian exports of straight-run heating oil and high-sulphur heating oil to China hit a record about 142,000 barrels per day in January.

Fuel oil can be processed in place of crude oil in large distillation plants, or used in secondary plants such as coke ovens to produce diesel or gasoline. HSFO can also be blended into marine fuels or bitumen. It was a barrel discount of $16 to $17 over pre-tax Brent, traders said.

China’s private refiners have been buying more straight-run fuel oil since late 2022 on attractive prices, said Mia Geng, an analyst at industry consultancy FGE. Private refiners sometimes choose to refine heating oil over crude to circumvent government-issued quotas designed to limit crude oil imports, but the recent surge in purchases is more likely because processors have been able to make sizable profits from processing , she said.

–Assisted by Kevin Dharmawan.

(Updates with analyst quote in paragraph 10.)

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