The declining refining margins, coupled with sluggish fuel demand in China, have led to significant repercussions for refineries in Shandong province, where two facilities owned by the chemical conglomerate Sinochem have recently filed for bankruptcy.

According to local court documents reported by Bloomberg, Zhenghe Group Co and Shandong Huaxing Petrochemical Group Co were declared bankrupt after creditors could not reach consensus on restructuring proposals for the refineries.

Additionally, a third Sinochem-operated refinery in Shandong, known as Shandong Changyi Petrochemical Co, is set to commence discussions with creditors later this month, as indicated by another local court statement referenced by Bloomberg.

For several months, most processing units at these three refineries have been inactive due to the significant drop in refining margins, which have particularly affected Shandong's facilities. Collectively, these refineries have the capacity to process 300,000 barrels per day (bpd) of crude oil.

This year, China has experienced lower-than-anticipated demand for road fuel, resulting in a decrease in refining margins and leaving many refineries in financial distress.

The lackluster demand has led to reduced oil refining output, as independent Chinese refiners are especially vulnerable to low margins and tend to cut back on production when both margins and demand are weak.

In early September, refining margins across Asia reached their lowest levels for this time of year since 2020, potentially prompting further reductions in operational rates among Asian refiners, including those in China.

In August, it was estimated that Chinese refiners processed approximately 12.6 million bpd of crude oil, representing a nearly 10% decline from July and a 17.5% drop compared to August of the previous year, according to a Monday report by ING commodities strategists Warren Patterson and Ewa Manthey.

These figures indicate that apparent oil demand fell below 12.5 million bpd, marking a decrease of over 15% year-on-year and reaching its lowest point since August 2022.

ING's analysts observed that crude oil inventories in China increased by approximately 3.2 million barrels per day in August, marking the largest monthly rise in these inventories since 2015.