China allows output cuts by some money-losing independent refiners, sources say

• Shandong independent refiners are losing an average of 752 yuan ($111) per ton of imported crude processed in May, up sharply from 202 yuan in April, due to higher crude costs and weak domestic fuel demand
• These refiners produced about 16% of China's gasoline and 25% of its diesel in May, but both fuels are now in plentiful supply due to transport electrification and export restrictions
• Despite the relaxed output mandate, refiners remain unprofitable and the 80% minimum production requirement still burdens a sector that would prefer to shut down entirely

Summary

Key Development: China's National Development and Reform Commission has permitted some independent refiners to reduce output starting June, allowing cuts to no less than 80% of last year's monthly average. This marks a significant policy shift from previous directives requiring refiners to maintain full production levels.

Main Players: Independent "teapot" refiners in Shandong province, which produce approximately 16% of China's gasoline and 25% of its diesel output.

Financial Impact: Shandong refiners are experiencing severe losses, averaging 752 yuan ($111.21) per ton of imported crude processed in May, compared to 202 yuan losses in April. The sector is losing money on every barrel refined due to:

• Rising crude costs from Iran war disruptions
• Capped domestic fuel prices
• Weak fuel demand

Market Context: The policy change reflects China's growing confidence in weathering the oil supply shock from the Strait of Hormuz closure, which previously carried one-fifth of global crude oil and LNG shipments. Domestic fuel supplies are now plentiful due to export restrictions and rapidly declining demand from China's electrifying transport fleet.

Operational Data: Shandong independent refiners operated at a 53.39% crude distillation unit run rate in May, down 1.94 percentage points from April but up 6.18 percentage points year-over-year due to earlier supply-security requirements.

Industry Outlook: Despite the easing, production mandates remain burdensome for money-losing refiners that would prefer complete shutdowns. Both gasoline and diesel are in oversupply domestically.