Run rates for China's beleaguered independent oil refiners have recently shown a slight increase, but they continue to encounter short-term pressure due to weak domestic fuel demand and supply risks stemming from U.S. sanctions and tariffs, according to industry participants and analysts. Reduced crude processing levels among the Shandong province's independent refineries, often called teapots, may diminish China's demand for oil, adding further downward pressure on a crude market already struggling due to tariff and recession concerns, per a Reuters report.
Teapots, which represent 25 per cent of China's processing ability, are major purchasers of discounted crude oil from Russia, Iran, and Venezuela, and they are heavily affected by the increasingly stringent U.S. position on exports from these nations, including sanctions in January that caused a notable decrease in shipments from Russia to China.
Teapots Struggle Amid Sanctions, Slump
The harsher external conditions add to declining domestic demand and Beijing's new policies on fuel oil tariffs and decreased tax rebates, prompting teapots to reduce operations and advance maintenance to January and February. According to data from local consultancy Oilchem, capacity utilisation rates for the teapots in Shandong increased to an average of 46 per cent in March, marking the first rise in three months. Nonetheless, the increases from last month stem from a low starting point, as rates fell below 45 per cent in early February, marking the lowest level in at least two years. March rates rose due to enhanced supply from Russia and Iran, with non-sanctioned tankers entering the profitable trade; however, they are still well under the 65 per cent capacity seen in late 2023.
In contrast, data from Oilchem indicates that China's state-owned refineries run at over 75 per cent of their capacity. Consultancy FGE predicts a rebound of 50,000 barrels per day (bpd) for the crude processing of Shandong independents in March, after a decline of 400,000 bpd from December 2024 to February 2025. According to Mia Geng, FGE's head of China oil analysis, runs are expected to improve further in April and May as domestic diesel demand increases seasonally but will still be 250,000 bpd lower than levels from the previous year. A decline in worldwide oil prices since mid-January and maintenance at refineries operated by state-controlled Sinopec (600028.SS), Asia's largest refiner, additionally promote increased teapot utilisation rates.
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According to Reuters calculations, multiple large refineries will halt at least 1.8 million bpd of crude processing capacity for maintenance in April, with output expected to decrease to around 1.2 million bpd in May. Geng stated that as more U.S. sanctions against Iran are anticipated, uncertainties in feedstock supply will persist, hindering profitability in the upcoming months. EVs, LNG, AND TRUMP Teapots, primarily producing transportation fuels, are under pressure from the rise of electric vehicle adoption in China and the shift towards cheaper liquefied natural gas replacing diesel as a fuel for trucks. According to a think tank linked to China National Petroleum Corp, China's consumption of gasoline and diesel is expected to decline by 3 per cent this year, following decreases of 3 per cent and 5 per cent in 2024.
On Wednesday, U.S. President Donald Trump announced new tariffs, which were met with China's response on Friday as they imposed an additional 34% tariff on all American products, escalating concerns about a global trade war that could further restrict China's fuel consumption. Supply constraints are increasing as the U.S. imposed sanctions on Shandong-based teapot Shouguang Luqing Petrochemical last month after Trump's demand for "maximum pressure" on Tehran. According to Janiv Shah, a vice president of oil markets at Rystad Energy, new sanctions on Iran could prompt teapots to increase imports from Russia, Brazil, and the Middle East or potentially lower production due to escalating crude prices. Reduced teapot operations could interfere with China's fuel exports and prolong instability in Asian and global oil markets, he stated.
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