The largest oil refiner in Asia and in China, Sinopec, is considering cutting refinery run rates as of November as soaring freight rates have eaten away at refining margins, people familiar with the plans told Bloomberg on Tuesday.
The global shipping industry has seen freight rates soar over the past few weeks as traders and shippers stay away from booking oil tankers owned by Chinese tanker companies that fell prey to U.S. sanctions for dealing with oil from Iran.
At the end of September, the U.S. imposed sanctions on several Chinese tanker owners for shipping Iranian oil, including units of Cosco, who owns more than 40 oil tankers, including 26 supertankers, or the so-called very large crude carriers (VLCCs).
The cost of chartering supertankers to carry crude oil from the Middle East to Asia soared by double digits overnight on the day following the announcement of sanctions as oil traders and shippers scrambled to understand the extent and impact of the U.S. sanctions.
Refining margins have yet to catch up with the surge in freight costs and currently, refiners are the ones that have to bear the higher shipping costs.
This dramatic increase in procurement costs for oil has led to Sinopec considering reducing refinery runs in November by one million tons, which would be equal to 5 percent of Sinopec’s refining output, one of Bloomberg’s sources said. Related: Buffett’s Big Bet On Energy
Some refiners in China and India have reduced spot oil purchases because of the surge in tanker rates, according to Bloomberg.
Sinopec is also considering cutting its oil imports for December, four sources familiar with the issue told Reuters on Tuesday.
“Refineries are facing strong pressure as spot premiums are high and freight rates have jumped, so it’s not economical to import crude,” one of the sources said.
Refiners in Asia may cut crude oil imports amid the high shipping costs, hurting overall demand, draining the oversupplied oil products market in the region.
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By Tsvetana Paraskova for Oilprice.com
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And whilst it is a sound economic decision by refiners to cut refinery run rates when their margins come under pressure, soaring freight rates have risen primarily because of escalating tension in the Gulf between the United States and Iran and the recent attacks on oil tankers and not because of US sanctions. As a matter of fact, freight rates continued at the same levels many months after the sanctions were introduced and only started to rise after the attacks on the tankers and the threat by Iran to close the Strait of Hormuz if its oil exports were prevented from passing through the Strait or if it was attacked.
Moreover, Iran has been shipping its crude oil exports to both China and India on its own tankers and also paying for cargo insurance as a sweetener.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London