Mainland refiners snapped up record volumes of Russia’s discounted crude oil last month as the West stepped up sanctions against the Kremlin over the annexation of Ukraine. According to customs data, oil imports pumped by the East Siberia Pacific Ocean pipeline and seaborne shipments from Russia’s European and Far Eastern ports totaled 8.42 million tonnes in May, or 1.98 million barrels per day (bpd). That is up more than 55% from April and a quarter higher than shipments from Saudi Arabia, China’s second-largest supplier.
The increase is in line with trade figures released this month that showed China’s overall trade with Russia soaring to levels not seen since Vladimir Putin ordered his troops into Ukraine in February 2022. The value of China’s crude oil and natural gas imports from Russia rose to $38 billion in the first half of this year, up more than 50% in the same period in 2022.
The surge in China’s crude oil imports from Russia is helping the Kremlin fill its coffers with foreign currency that can be used to fund military spending. In addition, the purchases are making it harder for the West to isolate Russia economically.
Western countries can easily cut off energy supplies to Russia, but imposing sanctions against its largest trading partner is more complicated. That is because the two overland pipelines connecting Russia to China have a maximum throughput capacity of only about 1.1 million bpd. Most of the oil is being imported via tankers.
The growth in China’s crude oil imports from its northern neighbor has irked some Western officials, who say that Beijing is ignoring sanctions in favor of its strategic relationship with Russia. They fear this could make the two countries increasingly integrated, with Beijing gradually turning Moscow into its pliant junior partner.
But in the meantime, Chinese non-state refiners are snapping up Russia’s crude oil at steep discounts. The April-arrival ESPO crude that arrived in China last month traded at a $7 a barrel discount against ICE Brent, which is a record low. That discount will likely narrow when more cargoes come on the market this summer, as tighter discounts at Baltic port terminals and continued Indian demand tame the premium for Russia’s Urals crude.
Traders said that state-run refiners will also likely ramp up their purchases of Russian oil as they look for additional supply to meet demand. This will add to the current hefty buying by independent refiners, which account for a large share of crude oil processing in China and have been boosted this winter by cheaper supplies from the Arctic, including Varandey and NovoPort. The prices for these rare Arctic flows are expected to be sustainable. In general, prices for crude oil in Asia are much lower than in the West, where a rebounding global economy is pushing up energy demand.