China Quietly Increases Purchases of Low-Priced Russian Oil

By Chen Aizhu and Florence Tan

SINGAPORE – China is significantly increasing its oil purchases from Russia, capitalizing on lower prices as Western buyers retreat following the invasion of Ukraine. According to shipping data and insights from oil traders, this move aims to fill the gap left by those buyers who have withdrawn from the Russian market.

This shift comes about a month after China initially decreased its Russian oil imports due to concerns about being perceived as overtly supporting Moscow and potentially exposing its oil companies to sanctions.

Estimates from Vortexa Analytics suggest that China’s seaborne imports of Russian oil could reach nearly 1.1 million barrels per day (bpd) in May, up from 750,000 bpd in the first quarter and 800,000 bpd throughout 2021. Leading the charge in these purchases is Unipec, the trading arm of Sinopec Corp, in conjunction with Zhenhua Oil, part of China’s defense conglomerate Norinco. Shipping data and reports indicate that Livna Shipping Ltd, a Hong Kong-based company, has also become a significant player in transporting Russian oil to China.

Following Russia’s invasion of Ukraine, which it terms a "special military operation," Western nations such as the U.S. and the U.K. quickly banned imports of Russian oil. The European Union is in the process of implementing additional sanctions, including an impending ban on Russian oil purchases. Numerous European refiners have ceased acquiring Russian oil to avoid potential sanctions and negative publicity.

Vitol and Trafigura, two leading global commodity traders, have gradually halted their transactions with Rosneft, Russia’s chief oil producer, in anticipation of EU regulations that took effect on May 15, which restrict purchases unless deemed "strictly necessary" for energy security.

The departure of firms like Vitol and Trafigura has created a vacuum that companies capable of providing value and earning trust among Russian counterparts are now filling, according to a Chinese trader who wished to remain anonymous.

The reduced pricing of Russian oil—currently about $29 per barrel lower than prior to the invasion—benefits Chinese refiners facing declining profit margins amid a slowing economy. These prices remain competitive compared to oil from the Middle East, Africa, Europe, and the U.S.

In addition, China receives approximately 800,000 bpd of Russian oil through pipelines as part of government agreements, which would elevate total Russian oil imports in May to nearly 2 million bpd, constituting 15% of China’s overall demand. For Russia, these oil sales provide a buffer against the economic impact of sanctions.

STATE BUYERS

State-owned Chinese firms, chiefly Sinopec and Zhenhua, are poised to acquire two-thirds of Russia’s prime Far Eastern export grade, the ESPO blend, this month, increasing from a third before the invasion. Russian exports in May are projected to be around 24 million barrels, reflecting a 6% increase compared to April.

Sinopec is anticipated to secure at least 10 shipments of ESPO in May, marking a twofold increase from pre-invasion volumes, with reports of some trades reflecting record discounts of $20 per barrel beneath the benchmark price for Dubai crude on a Free On Board (FOB) basis from Kozmino.

Both Sinopec and Zhenhua, along with Livna, are transporting more oil from Russia’s Baltic Sea ports and the Far East export hub at Kozmino.

Zhenhua, as the smaller state-run Chinese trader, has chartered vessels to facilitate the transport of Russian oil. Data indicates that North Petroleum International Co, a subsidiary of Zhenhua, loaded two ESPO shipments in early May along with additional Urals cargoes from the Baltic port of Ust-Luga in late April and mid-May.

Norinco, one of the largest defense contractors globally, ventured into oil production over two decades ago and has continued to broaden its trading arms.

Additionally, Zhenhua has procured part of its Russian oil supply through Paramount Energy, a Switzerland-based trader focused on oil from independent Russian and Kazakh producers for primarily private buyers. Paramount has been a regular supplier of ESPO to Chinese independent refiners since 2016 and has intensified its sales efforts towards Zhenhua after establishing a Beijing office in 2020.

Livna, which had not previously played a significant role in transporting Russian oil to Asia, has loaded over 7 million barrels of Russian Urals and ESPO oil for China since late April, marking a significant increase from earlier months. This firm had previously concentrated on shipping Russia’s Europe-oriented Urals exports.

In May alone, Livna has already loaded eight cargoes, nearly 6 million barrels of ESPO oil destined for China, and has also dispatched at least two Urals shipments from Baltic ports.

The exit of Western traders has also brought new participants to the market, such as the Shandong Port International Trade Group, backed by the provincial government, which aims to fill the gap in oil procurement.