Intro4u2u

Independent refiners in northern China, which ran fuel oil mixed with Sudanese crude to cut

costs when margins were bad, has shied away from the Singapore-supplied blend as profits

return with cheaper residue fuels.

But traders who had gained from selling the cocktail feedstock may find business again in

the same patch when China cuts retail pump prices, forcing the margin-sensitive “teapot”

refiners to fall back on lower-quality but cheaper raw material.

“We see other companies doing this trade, and we see demand from time to time from China for

this sort of material, which we think would continue for the short to medium term,” Mike

Scott, a director at European oil trader Trafigura, told Reuters.

Apart from refining margins, which also depend on oil product prices, he said demand for the

blended fuel hinged on the cost and availability of Russian M100 fuel, the staple feedstock

of “teapot” refineries.

Another factor is the supply of Venezuelan fuel oil offered by state oil firms to the

teapots.

The teapots in northern China turned to Singapore for supply earlier this year when their

feed of Russian straight-run M100 was diverted to Japan, where refiners were hankering after

cheaper feedstock.

The Singapore blend, a mix of Iranian 280-centistoke (cst) fuel oil and Sudan’s Dar Blend

crude oil, though inferior in quality, came close to the Russian M100 grade, traders had

said.

Unlike state-owned refiners Sinopec Corp and PetroChina , which are subject to political

pressures, the teapots operate mostly based on economics and are more sensitive to market

price fluctuations.

“It’s always about the pricing. They may not need to buy the cheaper blend anymore and can

go for higher quality feedstock,” said a Singapore-based trader.

SINGAPORE SUPPLY

China’s teapot refineries, which account for about a fifth of the country’s total refining

capacity, ramped up runs recently to meet improved demand from wholesalers stocking up on

motor fuels before an expected fuel tax hike, sources had said.

The refineries have been running at minimal rates or even ceased operations from July to

September, when record oil prices and poor products demand turned margins into the red.

Official Chinese data showed monthly fuel oil shipments from Singapore hit the highest this

year in April, at a total 583,754 tonnes of “No. 5-7 fuel oil” and “Other diesel and fuel

oil” — a category traders said might include fuel oil-crude mixtures.

The volumes from Singapore plunged below 200,000 tonnes in August and September and tumbled

to just 24,621 tonnes in October, as teapots faced high feedstock prices and heavy

stockpiles accumulated before the Olympics.

In particular, Singapore’s October supply of “other” fuel oil shrank to almost one-twenty

the volume in September at 9,488 tonnes, customs data showed on Monday, a figure that should

pick up if teapots turn to more blends from the city-state.

LID ON DEMAND

China’s pump prices are expected to be cut before the end of the year, a move that will

squeeze margins for the teapots and force them to look at cost-cutting solutions, some of

which Singapore blenders can offer.

But analysts were bleak on the outlook for overall fuel demand even after a price cut, which

they said meant business opportunities for mixed blends from Singapore would be limited.

“The demand side will put a lid on this trade,” said Victor Shum, an analyst with energy

consultancy Purvin & Gertz.

Analysts generally do not see a meaningful recovery in Chinese oil demand until second-half

2009, as the economic slowdown and impact from a massive stimulus plan will take more months

to properly unwind.

Margins could also be squeezed to a point where some teapots would choose to shut

operations, a path many had chosen over the last few months.

“If China cuts domestic diesel prices — and there’re expectations it will do so soon –

that will also narrow margins for the teapots and further limit the trade,” Shum said.

But other than Trafigura, there are other Singapore traders that seem to be betting the

mixed fuel oil blend will provide future business prospects.

Swiss energy trader Glencore International leased out most of its landed fuel oil tanks in

Singapore while taking up floating storage, a move some industry sources said signalled an

intent to supply more fuel oil-crude mixtures.