China’s independent oil refiners—colloquially known as “teapots”—have recently shown signs of life, with average crude throughput ticking up slightly in March. However, this uptick offers only a fleeting respite as the sector continues to grapple with a multitude of challenges ranging from tepid domestic fuel demand to intensifying geopolitical pressure.
Located primarily in the eastern province of Shandong, teapots account for about a quarter of China’s total refining capacity and play a pivotal role in processing discounted crude from sanctioned nations like Russia, Iran, and Venezuela. But their strategic advantage is turning into a liability amid fresh U.S. sanctions, a weakened local market, and shifting energy dynamics.
A Struggling Sector in a Volatile Market
Capacity utilization among Shandong-based teapots climbed to an average of 46% in March, marking the first increase in three months, according to data from local consultancy Oilchem. Yet this gain comes off a particularly low base: rates had dropped below 45% in early February, their lowest point in over two years.
While the March rebound was aided by improved crude flows from Russia and Iran—thanks to non-sanctioned tankers stepping in—the rates remain well below the 65% capacity utilization seen in late 2023. In stark contrast, China’s state-owned refining giants continue to operate above 75% capacity.
Consultancy FGE estimates that Shandong’s teapots recovered about 50,000 barrels per day (bpd) of crude throughput in March after a steep 400,000 bpd decline from December 2024 through February 2025. Analysts expect a seasonal boost in diesel demand to support further recovery through April and May, though throughput is still projected to lag behind last year’s levels by 250,000 bpd.
Sanctions, Tariffs, and an Uncertain Supply Landscape
Beyond weak domestic demand, teapots are increasingly feeling the squeeze from global politics. The Biden administration—continuing Trump-era hardline policies—recently imposed sanctions on Shandong-based Shouguang Luqing Petrochemical as part of broader efforts to curb Iran’s oil exports. Additional restrictions are expected, further threatening the supply of feedstock crude for these refiners.
As geopolitical risks mount, feedstock costs could rise, potentially prompting teapots to either seek alternatives in markets like Brazil and the Middle East or scale back operations altogether.
“There’s a real possibility of lower run rates in the coming months,” said Mia Geng, head of China oil analysis at FGE. “Volatility in supply due to sanctions will keep squeezing margins.”
Domestic Headwinds: EVs and Changing Consumption Patterns
Compounding the supply-side challenges is a structural shift in domestic fuel consumption. China's embrace of electric vehicles and cleaner fuels continues to erode traditional gasoline and diesel demand. A think tank under China National Petroleum Corp predicts a 3% drop in both gasoline and diesel usage this year, following similar declines in 2024.
The rise of liquefied natural gas (LNG) as an alternative to diesel for trucks also diminishes demand for the transportation fuels that teapots typically produce.
Trade War Tensions Reignite
Adding fuel to the fire, renewed trade tensions between the U.S. and China are stirring global economic uncertainty. U.S. President Donald Trump’s imposition of fresh tariffs last week, followed by China's retaliatory 34% tariffs on U.S. goods, has rekindled fears of a full-scale trade war—one that could further stifle China’s industrial activity and, by extension, fuel demand.
Global Implications
The knock-on effects of declining teapot operations could reverberate far beyond China. Analysts warn that reduced activity among these independent refiners may undercut China’s fuel exports and introduce more volatility into both Asian and global oil markets.
“Teapots may be small individually, but collectively, their swings have a noticeable impact,” said Janiv Shah, vice president of oil markets at Rystad Energy.
As the global energy landscape evolves and geopolitical tensions simmer, China’s independent refiners find themselves at the epicenter of a turbulent market. Whether they can adapt—or continue to falter—may shape not just China’s energy future, but that of the broader region.