China's Hengli scraps West African, Mideast oil purchases and cuts output, sources say

• Hengli cancelled deals for at least 6 million barrels, including 2 million barrels of West African oil already delivered and two 2-million-barrel Middle Eastern cargoes scheduled for July delivery
• The refinery shut one of its two 200,000-barrel-per-day crude distillation units in late June, reducing operations to 50% capacity from over 80% in May
• The cancellations are considered highly unusual for large refiners and may damage Hengli's future trading relationships, with unclear compensation for affected sellers

Summary

Key Development:

China's Hengli Petrochemical, previously sanctioned by the U.S. in April for allegedly purchasing Iranian oil, has cancelled crude oil purchases totaling at least 6 million barrels from West Africa and the Middle East. The cancellations are forcing the major independent refiner to significantly reduce operations.

Operational Impact:

• Hengli shut one of its two 200,000-barrel-per-day crude distillation units in late June
• Operating rate slashed to 50% capacity from 70% in early June and over 80% in May
• Total refining capacity: 400,000 barrels per day at its northeast China facility
• Inventory depletion cited as reason for production cuts

Cancelled Transactions:

• 2 million barrels of West African crude already delivered to third-party storage in east China last month
• Two separate 2-million-barrel Middle Eastern crude cargoes scheduled for July delivery
• One Middle Eastern cargo has been resold
• Reasons for cancellations remain unclear

Market Implications:

Industry sources indicate such large-scale cancellations by major refiners are extremely rare and could damage Hengli's future trading relationships and credibility. The company had structured purchases through multiple intermediary traders to minimize sanctions exposure for involved parties, making it difficult to determine which firms absorbed losses or whether Hengli provided compensation.

Context:

The cancellations occurred weeks after Hengli attempted to source non-Iranian crude to support removal from Washington's sanctions list. U.S. sanctions were temporarily lifted on Iranian oil for 60 days last week as part of an interim peace deal, though buyers under the new waiver remain unclear.