Domestic refiners to benefit from lower energy costs

China's oil refining sector, especially independent domestic refiners, are expected to benefit from the continued decline in global crude prices, industry experts said.

The fall in energy prices is to China's advantage in some ways amid the oil price turbulence and the novel coronavirus outbreak as the refining industry might benefit from lower energy costs, said Li Li, research director at energy consulting company ICIS China.

"The epic oil price plunge will be beneficial for domestic crude buyers and refinery producers in China, helping the country's petroleum industry reduce its costs," Li said.

"This will in turn benefit downstream industries that use petroleum products as a raw material to make plastics and other products, as well as the transportation, rubber and other industries which use petroleum on a large scale," she added.

According to S&P Global Platts Analytics, independent refineries in Shandong province, also known as teapot refiners, have lifted average run rates. China's recent granting of export quotas for refined oil products to non-State refineries in the Zhejiang Pilot Free Trade Zone will only lead to independent refiners maintaining a high run rate if they can export surplus products overseas.

Shandong's private refineries are accelerating production, with overall capacity moving toward the normal range of 65 to 70 percent, after its average capacity rate dropped to 36.9 percent in the last 10 days of February, the lowest level in five years, Feng Xu, an oil analyst with consultancy Sublime China Information, was quoted as saying by South China Morning Post.

Feng said average profit margins for Shandong refiners have surged, which could encourage the province's 44 teapots to boost imports and refining activity.

Nelson Wang, executive director of CICC Research, said companies at the receiving end of the oil price drop are poised to benefit the most, including refiners, which are expected to gain over the medium or long term, although they might also get hurt alongside their upstream peers due to inventory losses.

Once oil price stabilizes at a new and lower level, refiners historically tend to see their product prices fall less than the crude prices, thus enjoying a potential margin expansion, Wang said.

Russia, the United States and Saudi Arabia have recently agreed to coordinate action to help stabilize oil markets and minimize the impact of oil price volatility on the global economy.

Tang Sisi, an analyst with research firm BloombergNEF, said refiners will certainly take advantage of the low prices and increase their crude purchases.

But the growth of China's overall imports depends on storage availability and the recovery of fuel demand, Tang said.