China's powerful state planner has allowed some independent refiners to cut output from June, consultancies and sources said, a sign of Beijing's growing confidence that it can weather an oil shock triggered by the closure of the Strait of Hormuz.
Some refiners in the eastern province of Shandong, popularly called teapots, were told recently that they can cut output to no lower than 80 percent of last year's monthly average, consultancy Horizon Insights said in a note on Monday.
Two trade sources briefed by the refiners confirmed the notice from the National Development and Reform Commission, which did not immediately respond to questions sent by fax.
The change eases an earlier directive to refiners to hold output at an average of the past two years' level as Beijing sought to maintain domestic fuel supplies amid disruption from the Iran war, which closed the crucial Middle East waterway.
That policy squeezed refiners between capped domestic fuel prices and the rising cost of crude imports, and some were already cutting output last month as margins crumbled.
Early in May, some refiners in Shandong had sought permission from Beijing to lower processing rates or suspend operations at certain units, sources said.
Even with the latest changes, production requirements will still be a burden for the sector, which is losing money for every barrel it refines and would prefer to shut down altogether, said one of the two trade sources.
All the sources spoke on condition of anonymity as the matter is a sensitive one.
BOTH GASOLINE, DIESEL NOW IN PLENTIFUL SUPPLY
The Shandong independents produced about 16 percent of China's gasoline and a quarter of its diesel in May, Chinese consultancy OilChem said.
However, both fuels are now in plentiful supply thanks to export curbs and sharp declines in fuel demand from a transport fleet that has rapidly electrified over the past several years.
Shandong independent refiners' average crude distillation unit run rate was 53.39 percent in May, down 1.94 percentage points from April but up 6.18 percentage points on the year, due to the supply-security requirement, OilChem said.
However, they are racking up an average loss of 752 yuan (HK$871.02) for every ton of imported crude they process, versus a loss of 202 yuan in April, on weak domestic fuel demand and higher crude costs caused by the Iran war, it added.
Before the U.S.-Israel attacks on Iran, the Strait of Hormuz carried a fifth of global shipments of crude oil and LNG.
Reuters
