China ignores Price Cap, buys Russian oil at deep discounts

It appears to be business as usual for Chinese refiners, who continue to buy Russian crude and are ignoring the price cap imposed by Western countries. Due to tepid demand, however, China’s independent refiners are seeing the steepest discounts in months for Russia’s ESPO crude, traders told Reuters on Wednesday.

The price cap on Russian crude imposed by the EU, the G7, and Australia came into effect on Monday, but China hasn’t joined the so- called Price Cap Coalition, which bans maritime transportation services for Russian crude oil unless the oil is sold at or below $ 60 per barrel.

At least one cargo of ESPO, the crude from Russia’s Far East which is preferred by China’s independent refiners, the so- called teapots, was sold last week at a discount of $ 6 per barrel to the February ICE Brent price on the deliveryex- ship ( DES) basis, traders familiar with the transaction told Reuters. At the current price of Brent, this means that the ESPO cargo was sold at around $ 68 per barrel.

Chinese independent refiners don’t care much about the price cap, and their cargos are on a delivered basis, with insurance and shipping arranged by traders, Reuters’ sources said.

A trading executive at one independent Chinese refiner told Reuters, “They don’t really care about the price cap. All they do is crunch the numbers to see if the delivered prices make good profit or not.”

Currently, demand for crude in China is weak amid flip- flops on the Covid policy and many new daily Covid cases, with weak refining margins, too.

While China hasn’t joined the Price Cap Coalition, the fact that a price cap now exists gives the world’s top crude oil importer, as well as other buyers of Russian crude such as India, more bargaining power to negotiate steep discounts for the Russian crude even outside the price cap mechanism, analysts say.