China’s small private oil refiners, known as “teapots,” are freezing purchases of Russian crude, fearing they could be next on a Western blacklist. The catalyst for this panic is the recent blacklisting of Shandong Yulong Petrochemical Co. by the UK and European Union, which has served as a powerful cautionary tale.
This fear is complementing a broader pullback led by China’s state-owned giants. Sinopec and PetroChina Co. are also staying on the sidelines, having canceled Russian cargoes. Their avoidance stems from new US sanctions targeting Russia’s top producers, Rosneft and Lukoil, making any association with them risky.
The consequence for Russia is a sharp drop in demand from its biggest customer. Prices for its key ESPO grade crude have fallen significantly. Rystad Energy AS quantifies the “buyers’ strike” as affecting some 400,000 barrels a day, or up to 45% of China’s total Russian oil imports.
This development threatens to undo Russia’s success in pivoting its energy exports to Asia. Moscow became China’s top supplier by offering steep discounts after the Ukraine invasion, but the US and its allies are now systematically targeting those who buy its oil in an effort to cut off Moscow’s war funding.
The situation for the teapots is further complicated by domestic policy. They are running up against a shortage of import quotas for crude oil, a problem exacerbated by recent tax changes. This quota shortage means that even if they were willing to risk sanctions, their ability to purchase Russian oil for the remainder of the year is already severely limited.