China’s Oil Buying Rules Further Loosened Amid Record Imports

China is loosening restrictions under which companies are allowed to import oil, a move that may solidify it’s spot above the U.S. as the world’s largest importer.

The government announced new guidelines on Thursday that opens the door to the direct purchase of crude on the international market by independent refineries, known in the industry as teapots. It’s the latest step in a rapid deregulation of a business that less than a year ago was limited to either government-owned oil processors or trading companies required to sell to them.

“This would be the first time non-state refiners are potentially being granted licenses,” Liu Aiying, president of Shandong Oil Refining Association, which represents independent refiners, said by phone Thursday. “Previously, there were dozens of non-state companies that had such rights, but not many utilized them because they were forced to sell to refineries owned by the nation’s top two oil companies.”

The rules released Thursday build upon an earlier opening by regulators in February that eventually led to five independent refiners being granted licenses to process imported crudes -- though not allowing them to buy it directly.

Shandong Dongming Petrochemical Co., Sinochem Hongrun Petrochemical Co., Panjin North Asphalt Co., Shandong Lijin Petrochemical Co. and Kenli Petrochemical Co. have been granted licenses to process a combined 25.8 million metric tons of imported oil a year (about 518,000 barrels a day). Those first five teapots are probably the front-runners to get the direct import license later this year, according to Liu. The country’s refiners processed almost 10.6 million barrels a day last month, according to the National Bureau of Statistics.

Futures Liquidity

The new licenses are open to refiners that have at least one crude distillation unit that can process no less than 2 million tons a year and an available credit line of $1 billion certified by commercial banks, the Ministry of Commerce said in a statement posted on its website on Thursday. The companies must also have a team of at least five people with over five years of international trading experience and oil storage capacity of 300,000 tons, according to the statement.

China, the world’s second-largest oil consumer, is widening access to crude supplies as imports rise to a record amid a global supply glut that’s driven prices down by about half in the last 12 months. The country imported about 7.2 million barrels a day in June, topping inbound shipments to the U.S. last month that averaged 7.08 million barrels a day.

The import licenses will also add liquidity to China’s planned oil futures market, said Ivan Szpakowski, a Hong Kong-based analyst with Citigroup Inc.

“Allowing more companies to have the right to import will create more buyers for the physical delivery mechanism” in the futures contract to be started in Shanghai, Szpakowski said.

— With assistance by Sarah Chen

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