…Tax changes limit oil demand from “teapot” refiners
…Aggressive selling of West Africa crude added to backlog
LONDON/BEIJING, MARCH 29, 2018 – A backlog of crude cargoes has built up off the coast of China, limiting prospects for new shipments to the world’s largest oil importer, trading and shipping sources said.
The amount of oil floating in tankers off China has risen partly due to tax changes and an anti-pollution drive that have depressed oil demand from small, independent refiners, known as “teapots”. Maintenance has curtailed run rates at others.
This has combined with aggressive selling, particularly from West Africa, that pushed vessels to the region even when early warning signs showed crude demand could falter.
“Traders overestimated demand,” said Michal Meidan, Asia analyst with Energy Aspects, adding that Chinese margins were squeezed by the tax changes and rising crude benchmark prices.
“Barring any significant discounts on these cargoes, teapots may leave these tankers floating for some time,” she said.
Data from oil analytics firm Vortexa showed oil in short-term floating storage in Asia averaged about 15 million barrels in March, the highest monthly level since October 2017. The level of short-term storage peaked this month at 22 million barrels.
Vortexa defines short-term floating storage as oil on vessels for 7-30 days.
Three traders said there were around 19 to 20 vessels waiting off the Chinese coast, mostly in the area around Shandong where most teapot refineries are based. This compared with what traders said was a more typical figure of 10 or so.
A Reuters compilation of vessels from Vortexa and industry monitor Genscape showed the bulk of the oil waiting on ships came from West Africa, specifically Angola, Equatorial Guinea and Republic of Congo, but cargoes from Brazil, the Middle East and the North Sea were also waiting.
One trader said the amount of floating West African crude had grown particularly strongly. “It looks like it’s really building up,” he said.
Reuters tracking showed several ships had been waiting a week or so to offload. But some, such as the very large crude carriers (VLCCs) New Frontier carrying Angolan oil and New Prosperity with Iraqi crude, had been waiting since early March.
An earlier rush to import following the issuance of new import quotas had flooded the market just as it entered the spring maintenance period, said Zhang Liucheng, vice president of the Shandong Dongming Group.
The government allocates import quotas in batches.
“We’ve seen overflowing tanks in Shandong and pipeline constraint remains a big problem,” Liucheng said, although he added that there had been worse periods of congestion in the past.
Sources in Asia said most larger teaport refineries were still running well but smaller ones were more sensitive to the tax policy change. “Domestic demand is not as good as before, but the supply (of crude oil) is still a lot,” one source said.
The new tax rules, issued in January and which came into effect on March 1, aimed to address a long-standing complaint by state-owned oil firms that the privately owned refiners and blenders had grabbed market share by undercutting their prices through tax avoidance.
Oil traders in the Atlantic Basin, which rely heavily on exports to Asia, said the backlog was limiting their ability to book fresh shipments without slashing prices, which could have a knock-on effect on global oil prices.
China’s Unipec, one of the largest buyers of West African oil, has been offering some of its cargoes for sale in recent days, which some traders said indicated there was a backlog.
“It is squeezing us out,” another seller of West African oil said. “It’s a very dead market for us.”