China is buying Russian ESPO crude oil at the deepest discounts in months amid weak demand and poor refining margins.
The effective prices refiners pay could exceed the $60 per-barrel cap, set by the Group of Seven (G7) nations, the European Union and Australia, that came into effect on Monday.
China, Russia’s top oil buyer, has not agreed to the price cap. Traders said they were doing business as usual.
China’s independent refiners are the dominant clients of ESPO – a grade exported from the Russian Far East port of Kozmino – and nearly always secure the shipments on an “as delivered basis” from traders who arrange shipping and insurance, thus shielding the refiners from possible secondary sanctions that may result from the price cap.
The light sweet crude is favoured by Chinese refiners due to their proximity and the oil’s high middle-distillates yield.
Traders said ESPO’s cheapness could soon attract fresh buying from Chinese buyers on hopes that Beijing’s relaxation of pandemic controls over the past week could reignite demand.
At least one December-arrival ESPO cargo was sold last week to an independent refiner at a discount of $6 per barrel. That compares with a premium of about $1.80 per barrel three weeks ago. At current Brent levels, the $6 discount implies a price of $68 a barrel including freight and insurance costs.
“They (independent plants) don’t really care about the price cap. All they do is crunch the numbers to see if the delivered prices make good profit or not,” said a trading executive with one independent refiner.
- Reuters, with additional editing by Vishakha Saxena