Due to a lack of government crude oil import quotas, some private Chinese refineries are increasing their purchases of discounted fuel oil blended from Russian barrels to use as low-cost feedstock.

Industry sources say the discounts given on these fuel oil cargoes serve to enhance profits at independent Chinese refiners and substitute crude that certain businesses cannot purchase without quotas. This deal will help get Russian oil to market and deliver much-needed export profits to Moscow.

Because of the impending embargo and price restriction on refined products that the West has imposed on Russia because of its invasion of Ukraine, Russian fuel oil barrels have been moving eastward into Asia at favorable discounts during the past year.

Since the second quarter of 2022, they have begun pouring into the port of Fujairah in the United Arab Emirates and the port of Malaysia. According to market sources, traders mix these barrels with other oils to disguise the nation of origin, allowing them to obtain insurance and funding for ships that would be prohibited under the sanctions.

According to one source, the most recent deal for these mixed fuel oil barrels was conducted at a discount of around $5 to benchmark crude ICE Brent on a delivered Shandong basis.

Since the second quarter of last year, the value of high-sulfur fuel oil has fallen relative to crude, with cracks reaching historic lows towards the end of October.

Official customs statistics indicated that in December, China imported roughly 1.76 million tonnes of fuel oil, the biggest amount since September 2021.

Increased shipments from Malaysia (620,000 tons) and increased imports from the United Arab Emirates (471,000 tons) also contributed to the growth. Both figures are at their best levels in over two years.

However, overall imports from Russia more than quadrupled year-on-year to 3.1 million tonnes in 2022, with direct imports falling to 187,000 tonnes in December from a record of 554,000 tonnes in October.

"The deep discounts offered are driving the trend as independent refiners are price sensitive. China is still recovering, with domestic demand for refined fuels uncertain," Emril Jamil, Refinitiv's senior analyst for crude and fuel oil, said.

It's expected that this trend will continue after the EU ban (on February 5), when all natural outlets will be sealed down across Europe. Adding to their demand for Russian crude, Asian countries will continue to import Russian (fuel oil) barrels at a discount.

These fuel oil supplies to China have primarily come from Western trading houses, according to four senior trade sources who monitor the flows regularly and predict that the current high levels, which began in December, will continue far into February and beyond.