China's independent refiners cut output in May as losses mount, sources say

• Independent refiners face estimated losses of 500-600 yuan ($74-88) per metric ton of crude processed in late April, compared to a profit of 269 yuan per ton a year earlier
• The cuts come despite Beijing's April directive ordering teapots not to reduce run rates below two-year averages, with threatened penalties for non-compliance
• Lower output from these refiners, the world's largest buyers of sanctioned Russian and Iranian crude, will reduce demand for those barrels as China battles weak fuel demand and domestic supply glut

Summary

Key Development:

China's independent refiners in Shandong province are cutting fuel production in May despite government directives to maintain output, as mounting losses and weak demand erode profitability.

Critical Figures:

• Operating rates dropped to approximately 50% in May from 55% in April, with further declines expected
• Refiners face losses of 500-600 yuan ($74-$88) per metric ton of crude processed as of late April
• Industry-wide losses reached 649 yuan per ton in April versus a 269 yuan profit a year earlier
• Some refiners cut run rates by 5-10 percentage points from April levels

Market Context:

The Iran war has disrupted Middle East oil supplies and closed the Strait of Hormuz, causing previously discounted Russian and Iranian crude to trade at premiums to ICE Brent. Independent refiners ("teapots"), the world's largest buyers of sanctioned crude, exhausted their cheap stockpiles in April and are avoiding purchases at elevated prices. Simultaneously, weak domestic fuel demand and oversupply have created a glut, pressuring gasoline and diesel prices.

Government Response:

In early April, China's National Development and Reform Commission ordered teapots to maintain run rates at two-year averages, threatening penalties for non-compliance. On May 9, refiners sought provincial approval to lower processing rates or suspend operations. Beijing has not yet approved these requests, and enforcement of the original directive remains unclear.

Market Implications:

Reduced Chinese refinery output could significantly decrease global demand for sanctioned Iranian and Russian crude, potentially affecting oil trade flows and prices for these barrels in the world's top importing nation.