By Muyu Xu and Chen Aizhu
SINGAPORE (Reuters) - Chinese refiners are slowing down Russian crude purchases in December and paying lower premiums in the face of imminent European Union sanctions and uncertainty surrounding the G7's plan to cap Russian oil prices, trading sources said.
The slowdown in trade is causing Russian crude supplies to build up, weighing on prices, as China and India have become major buyers of the oil since the Ukraine war broke out. The European Union will ban Russian crude and oil products imports on Dec. 5 and Feb. 5, respectively.
"There are, of course, many concerns and much confusion regarding to the upcoming price cap, but people think the December-arriving cargoes should be safe (to buy)," a China-based trader said.
About five to seven December-loading ESPO Blend cargoes have been sold to Chinese end users, a fraction of the average of about 30 shipments Russia exports each month, traders said.
Deals were last heard at around $1.70 to $1.90 a barrel above February ICE (NYSE:ICE) Brent on a delivered ex-ship (DES) basis, falling from premiums of about $2.70 a barrel two weeks ago amid slow trade, they said. That was also lower than premiums of about $2 a barrel for November cargoes.
"Everything is under the radar now. It's hard to drill down the terms and conditions agreed for those small number of transactions," said a Chinese trading executive.
Buyers are watching out for possible impact on payment mechanism, availability of ships and shipping insurance from the G7 plan to impose a price cap to curb Moscow's oil revenue. Moscow has threatened to halt exports to countries participating in the plan.
U.S. Treasury Secretary Janet Yellen said the Russian oil price cap will benefit China and India.
Some independent refiners have bought alternative supplies from Brazil and West Africa to hedge against Russian oil disruption in December, despite higher prices, traders said, as they ramp up output post-maintenance.
Operating rates at independent refiners have climbed to about 64% in early November, from 58% two months ago, data from Zhuochuang consultancy showed.
"It's better to secure some cargoes, just in case Russian supply is not sustainable," a Shandong-based oil trader said.
URALS
Meanwhile, state refiners are winding down Russian Urals crude purchases for December arrival to eschew sanction risks after stockpiling the oil in previous two months, traders said.
October Urals shipments into China were estimated at 235,000 barrels per day to 340,000 bpd, majority of which were bought by state-run firms such as Unipec, Zhenhua Oil and Chinaoil, according to tanker trackers Kpler and Vortexa Analytics.
That would be the highest volume in two years, said Vortexa's China analyst Emma Li, adding that state firms accounted for 85%, three times their average during the first nine months.
For supplies loading post Dec. 5, state firms were still weighing risks of sanctions versus the need to secure supplies.
Spot discounts for these cargoes "need to be deep enough to warrant any meaningful risk taking", said the state oil trading manager.