China’s Teapot Refiners Cut Output Amid Hormuz Crisis
Independent or so-called “teapot” refiners in China have begun cutting their output as profit margins shrink and fuel demand weakens due to ongoing disruptions in the Strait of Hormuz. The crisis in this strategic maritime chokepoint has led to a sharp rise in crude oil prices, squeezing refining margins and compelling Chinese refiners to scale back operations.
Media reports indicate that the average operating rates of these teapot refiners in Shandong province have declined to around 50%, down from 55% in April. This reduction is expected to deepen if the conflict in the region continues, with losses estimated between $74 and $88 per ton of processed crude oil. The continuing war and supply disruptions have had a significant impact on Asia, the largest global oil demand center, with potential crude run cuts reaching up to 6 million barrels per day in April.
Earlier during the crisis, Chinese authorities reportedly instructed private refiners to maintain high output levels of gasoline and diesel, even at a financial loss. This directive was linked to the government’s control over crude import quotas, which are allocated quarterly or semi-annually. Refiners were warned that reducing run rates could lead to sharp reductions in these quotas. However, faced with unsustainable losses, it appears many teapot refiners are now willing to risk quota cuts to manage their financial viability.
A source familiar with the situation said, “Without cutting output, the losses are unbearable,” highlighting the difficult balance refiners must maintain amid the turmoil.
China’s position is somewhat buffered compared to its regional neighbors because of a strategic stockpile estimated at around one billion barrels, built up over recent years. This reserve provides some protection against immediate supply shocks and helps keep domestic fuel prices relatively stable. Nevertheless, this cushion is limited, and the Chinese government and refiners continue to carefully manage supply to prevent sharp price spikes in the domestic market.
The Strait of Hormuz remains a critical artery for global oil shipments, and the ongoing conflict has had far-reaching effects on the global energy market. With about 65% of Asian refiners reliant on Middle Eastern crude, disruptions here translate directly into reduced refinery throughput and higher costs.
Looking ahead, the continuation of the crisis may force further reductions in refining activity across Asia, exacerbate energy supply challenges, and prompt policymakers to reconsider fuel allocation and import strategies. The coming months will be critical in determining how both China and the broader region navigate these compounded risks to their energy security.