Traders Snap Up Oil Ahead of Expected Jump in Chinese Demand

(Bloomberg) -- Oil traders are buying up cargoes and sending them toward China, hoping to capitalize on an expected surge in demand at the end of the year when independent refineries there get new import licenses for 2021.

Firms including Mercuria Energy Group, Unipec and CNOOC were among those seen actively purchasing cheap spot cargoes of Angolan, Nigerian and Russian crude for as early as November loading, traders said, with the volumes larger than normal. The cargoes will likely make their way slowly to China, the traders said. Press officials from Mercuria and Sinopec declined to comment, while CNOOC didn’t respond on the matter.

The strategy is a bet on so-called spot differentials, the discount or premium attached to physical crude at the point of sale. They have been weak for weeks, in part because the independent plants known as teapots have scaled back on buying foreign crude after exhausting government-issued quotas. The traders are hoping the differentials will strengthen around the end of the year when the import limits are typically refreshed for purchases arriving from January onward.

“If one has to gamble on which market offers new demand now, China is the bet,” said Yuntao Liu, a London-based analyst with Energy Aspects. “So why not send the cargo over first, otherwise when December comes, if China needs oil, no cargo could arrive in time.”

The Chinese government is expected to release 2021 teapot quotas in the final weeks of December. Every year, uncertainties surrounding the expiry of current-year quotas and release of next year’s allocations provide opportunities for traders to take positions in anticipation of new buying trends come January.

Year-End Lull

This year, the presence of a contango -- where prompt cargoes trade at a discount to later shipments -- and cheap supertanker freight rates are also helping to offset some of the cost of holding stockpiles for delayed sales.

That’s letting traders take advantage of physical crude that’s seen lower spot differentials for weeks, in part because Chinese private refiners have pulled back on purchases due to low import quotas and their margins getting squeezed.

Once a teapot refinery uses up its import allowance, it can choose to buy quotas from others or pay state-owned companies with no restrictions to procure on their behalf. In some cases, buyers forked out as much as 300 yuan per ton, the equivalent of $6 a barrel, to circumvent restrictions, said three traders who regularly sell crude to teapots.

These costs eroded returns for teapots, causing them to lose out on refining margins of about $4 to $5 a barrel nationwide, said Chen Jiyao, head of energy consultancy FGE’s China client advisory services. Gasoline prices have also been under pressure following China’s Golden Week holidays. The combination will force teapots to cut runs by 200,000 to 250,000 barrels a day during November and December from September levels, Chen said.

Rising Differentials

That led to discounted spot differentials and a rise in the amount of oil held in floating storage. Last month, Angola’s Saturno was sold at a small discount to London’s Dated Brent, while Russian ESPO traded at a 50- to 90-cent premium to Dubai prices, traders said.

Traders that swooped in for those cargoes may already be looking at a small profit, with ESPO recently trading at a three-month high premium of $1.80 a barrel, and Saturno expected to rise in sales of December cargoes, according to traders. As recently as June, when Chinese oil purchases jumped to a record, ESPO premiums were as high as $3.90 a barrel.

Traders buying now are hoping fresh teapot demand will drive a return toward those levels. Rongsheng Petrochemical, the biggest independent refiner, recently snapped up millions of barrels of oil to supply an expansion at its plant and extended its binge this week. Companies holding on to extra barrels can ultimately choose to resell them at any time -- even to non-Chinese buyers -- should a more profitable option come along.

And new quota aside, Chinese buyers are also expected to move quickly to secure crude feedstock for their refineries to make fuel and plastics in time for the Lunar New Year holidays in mid-February.

©2020 Bloomberg L.P.

With assistance from Bloomberg