China is paying the deepest discounts in months for Russian ESPO crude oil amid weak demand and poor refining margins even though the effective prices refiners pay could exceed a price cap imposed this week by Western countries.
The $60 per-barrel cap, set by the Group of Seven (G7)nations, the European Union and Australia, took effect on Monday to limit Moscow's power to finance its war in Ukraine, though Russia has vowed to defy it.
China, Russia's top oil buyer, has not agreed to the price cap. Traders said they were doing business as usual.
China's independent refiners, dominant clients of ESPO, a grade exported from the Russian Far East port of Kozmino, secure the shipments almost all on delivered basis from traders who arrange shipping and insurance, shielding the refiners from possible secondary sanctionsthat may result from the price cap.
The light sweet crude is favoured by Chinese refiners due to their proximity and the oil's high middle-distillates yield.
But the Chinese government's zero-Covid policy has weakened the country's economy and demand for crude.
At least one December-arrival ESPO cargo was sold last week to an independent refiner at a discount of $6 per barrel against the February ICE Brent price on the delivery-ex-ship (DES) basis, according to four traders with knowledge of the deal.
That compares with a premium of about $1.80 per barrel three weeks ago. At current Brent levels, the $6 discount implies a price of $68 a barrel including freight and insurance costs.
"They (independent plants) don't really care about the price cap. All they do is crunch the numbers to see if the delivered prices make good profit or not," said a trading executive with one independent refiner.
"Domestic refining margins are still struggling," the executive added.
On Thursday, there were still two December-loading cargoes unsold, and offers had fallen to discounts of around $7 to $8 a barrel, two trading sources said.
Some early trades of January-loading cargoes were done at $4 a barrel below the March ICE Brent, the lowest level for front month ESPO since July.
Benchmark Brent LCOc1 slid to its lowest since January on Tuesday at below $80.
Traders said ESPO's cheapness could soon attract fresh buying from Chinese buyers on hopes that Beijing's relaxation of pandemic controls over the past week could reignite demand.
"It could be expected that some buyers of Russian crude might take a cautious approach in the first few weeks, reducing imports until the legal implications of such trade are clearer," said Rystad Energy analysts Viktor Kurilov and Jorge Leon in a note on Tuesday.
With the price cap in place, China, India and Turkey could have more bargaining power, the analysts added.
In Shandong, a province with many independent refiners, known as teapots, ESPO is also facing increasing competition particularly from Iranian oil, which traded at a discount of nearly $10 against ICE Brent last week.
Tanker tracking specialist Vortexa Analytics estimated that Chinese imports of Iranian oil, passed off as supplies from such exporters as Malaysia and Oman, may have hit a monthly record of nearly 4.7 million tonnes in November.