Key Takeaways:
Some independent refiners in China's Shandong province are cutting fuel output as processing margins collapse, with losses mounting to more than 500 yuan per ton. The cuts, which began in early May, have seen average operating rates at the small refiners, known as teapots, fall to around 50% from 55% in April, according to sources familiar with the matter.
The independents face an estimated loss of 500 yuan to 600 yuan ($74 to $88) for each metric ton of crude processed in the last week of April, one source said. Data from commodities provider SCI showed Chinese refiners suffering losses of 649 yuan for each ton of crude processed in April, a sharp reversal from a profit of 269 yuan a year earlier.
These production cuts are a direct response to a surge in crude costs following the start of the Iran war and persistently weak domestic fuel demand. China's total crude imports fell to 9.37 million barrels per day in April, the lowest in almost four years, as refiners balked at higher prices. Brent futures hit a 2026 high of $126.41 a barrel on April 30, a 74% increase from late February.
The move to reduce output directly challenges a directive from Beijing, which in April called on teapots to maintain production levels to ensure domestic supply. The lower runs erode demand for sanctioned Iranian and Russian crude, of which teapots are major buyers, and signal that for some operators, unbearable losses are a more immediate threat than government pressure.
The refiners' predicament is twofold: the price of their main input has soared while the value of their output is being suppressed. Teapots that had stockpiled cheaper crude ran through their inventories in April and were forced to confront a market where sanctioned barrels, typically discounted, were trading at premiums.
Simultaneously, weak domestic demand and government-imposed curbs on fuel exports have created a supply glut within China, weighing on gasoline and diesel prices. China's exports of refined products fell 33% in April from March to just 3.1 million metric tons, the lowest level in a decade, keeping more fuel trapped onshore. Some refiners have reportedly requested permission from the Shandong provincial government to lower processing rates or suspend operations, but it is unclear if Beijing will approve these requests.
This article is for informational purposes only and does not constitute investment advice.
