China to Become Even More Dominant Oil Buyer After New Tax Code

Planned tax adjustments in China are sparking a chain reaction that’s set to boost crude imports and raise refinery run rates across the Asian nation, adding to its dominance in the global oil market.

From mid-June, the top crude importer will introduce a levy on inbound flows of three oil-related items — bitumen mix, light-cycle oil and mixed aromatics — that are often used to make low-quality fuels or processed in refineries. Faced with the prospect of costlier products, Chinese buyers are on the hunt for barrels of suitable crudes they can use themselves to make replacements.

China is likely to cut light-cycle oil imports on new tax code

Already, there are signs of a cascading effect. Spot differentials for Middle Eastern and Russian crude have risen to a multi-month high, while timespreads for Dubai crude strengthened on expectations China will continue its oil-purchasing spree. The spreads are a key gauge of the supply-demand balance.

“The Asian spot market is receiving temporary support from the recently announced tax on diluted bitumen in China,” said Grayson Lim, a senior oil analyst at industry consultant FGE. “Robust Asian spot activities should continue in months ahead as crude balances tighten.”

The knock-on effects of the new levy are playing out as China continues its recovery from last-year’s pandemic-driven hit. With the virus largely under control — in sharp contrast to other parts of Asia — Chinese refiners have been trying to meet the sharp rise in demand for fuels such as gasoline and diesel as personal mobility increases and industrial demand improves.

Outside the industry, the affected products are not well-known, but they are just some of the many key building blocks that flow from crude. Bitumen mix can be used to produce material for roads or processed in refineries to yield poor-quality fuels, while light-cycle oil can be blended into diesel or fuel oil.

See also: China May Buy More Heavy Oil, Export Less Fuel on Tax

The new tariffs suggest both bitumen mix and light-cycle oil won’t be as cheap for processors to import in large volumes anymore, according to traders surveyed by Bloomberg. That will push them to buy other types of sludgy crude, or force refiners to pick up more crude that yields more diesel.

In turn, that’s likely to mean some Chinese refineries will need to ramp up rates at plants to take on the increased crude supply, churning out their own fuels like diesel and fuel oil for domestic use or exports, the traders said.

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