Chinese teapots provide edge over US for world's top oil buyer

[SHANGHAI] China's lead over the US as the world's biggest buyer of crude oil is poised to get bigger, and it's largely thanks to teapots.

Dozens of small refiners, known as teapots to those in the industry, account for a third of the Asian nation's processing capacity. They are now expanding as new rules will almost double the amount of crude the refiners, including Shandong Yongxin Energy Group, can import.

America, the world's largest economy, is now the least reliant on foreign oil since 1994, while China is taking advantage of the slump in prices to expand its strategic stockpiles - a strategy that helped it overtake the US as the biggest buyer last month. The flow of oil to Asia will help create a global supply deficit by the end of the year, according to Sanford C Bernstein Ltd.

"The expected new crude import quota for teapot refineries will help bolster China's appetite for foreign oil," said Gao Jian, an analyst at SCI International, a Shandong-based consultant.

"Crude imports this year will exceed 2014's level."

China bought a record 7.4 million barrels a day in April, up almost 17 per cent from March and 3.1 per cent from the previous high in December, customs data show. The US imported about 7.3 million barrels a day, according to government figures.

The US need for foreign oil is waning amid record domestic oil production. The Energy Information Administration forecasts the country will import an average 6.54 million barrels a day next year, down from 6.69 million in 2015. It received 6.99 million last year.

China's record purchases are adding to signs of increasing demand that will create a global shortfall of 1.5 million barrels a day in the fourth quarter, Bernstein said in a May 27 report. That'll drive up Brent crude prices to US$80 a barrel, the researcher predicts. The European oil benchmark traded at US$63.22 on the London-based ICE Futures Europe Exchange as of 10:22 am local time on Friday. Prices are down about 5 per cent in May.

China may still surrender its status as the world's biggest importer back to the US in coming months as refineries shut for maintenance. Companies that account for 12 per cent of the nation's processing capacity are scheduled to close units during the second quarter, ICIS China estimated earlier this month. It may not surpass the US on an annual basis until 2017, according to the Shanghai-based energy consultant.

Brent tumbled almost 50 per cent last year as the Organization of Petroleum Exporting Countries chose to protect market share over cutting output amid a global oversupply. China responded by stepping up purchases to fill its emergency supplies.

While five state-controlled refiners have licenses to import crude, independent companies need special approval from the government. China National Chemical Corp. in 2012 became the first teapot to be allowed to import, with a quota of 10 million tons a year. Guanghui Energy Ltd. was the first non-state company when it was allocated 200,000 tons for 2014.

Shandong Dongming Petrochemical Group was given an initial quota of 7.5 million tons for 2015, the National Development and Reform Commission said May 27. It's likely to start purchases in June or July, Citigroup Inc. said in a note Thursday.

Teapot refineries, which are located mostly in the eastern province of Shandong, are likely to get quotas for as much as 30 million tons of foreign oil in 2015, according to China International Capital Corp, a Beijing-based investment bank. That's about 600,000 barrels a day.

"We were among the 22 independent refineries that attended a meeting with the provincial government," said Kong Jing, manager at Shandong Yongxin, which employs more than 2,600 workers.

"They assured us that we'll be getting crude import quotas."

The company may start building a new processing unit in the second half of 2015, Mr Kong said. The plans are part of a broader expansion by teapots that will boost refining capacity by 15 per cent this year to almost 220 million tons, or about 4.4 million barrels a day, ICIS China estimated in November.

Teapots are also using more crude as they switch from fuel oil, which yields lower quality gasoline and diesel. Crude accounted for almost 70 per cent of the feedstock used by the plants last year, compared with 53 per cent in 2011, according to SCI International.

"Over the past two years, China's independent refineries have made a visible transition to use crude oil as their feedstock as it makes better returns," said Li Li, a research and strategy director at ICIS China. "This trend will expand."

BLOOMBERG