The government of Shandong province, China's independent refinery hub, has asked Beijing for an extra 3 million metric tons of fuel oil import quotas for the rest of 2023 to enable plants to raise output amid a shortage of crude oil quotas, trading sources and a consultancy said.

The first such request from the Shandong government, if approved, could bring total fuel oil import quota for 2023 to 19.2 million tons. It would compensate for lower crude oil import allowances received by independents this year.

Additional fuel oil import quotas would allow independents to tap abundant global supplies, especially the cheaper straight-run residue from Russia, to lower their feedstock costs and increase refining output in November and December.

Independents often switch to processing straight-run fuel oil to produce higher-value diesel and gasoline for better economics or when crude quotas are tight.

The refiners stepped up fuel oil purchases during the first nine months, using up the 16.2 million tons of permits issued so far in 2023, traders said.

"It appears that the Shandong government came to the 3 million ton figure based on the average monthly fuel oil imports into the province, roughly at 1.5 to 1.7 million tons, earlier this year," said a trading manager at a Shandong refiner.

The Shandong provincial government and the Ministry of Commerce did not immediately respond to Reuters' request for comment.

China issued the last batch of crude oil import quotas in early October but the volume was smaller than expected, while permits issued earlier had already been nearly exhausted, traders said.

The shortage of crude import permits coupled with thinning margins is pressing independent plants to lower throughput alongside state refiners and weighing on global crude prices . Independents, known as teapots, account for roughly one-fifth of crude imports into the world's largest buyer.

New fuel oil quotas would help fill refiners' feedstock gap and ease cost pressures, local commodities consultancy JLC wrote in a note last Friday.

Unlike crude import quotas, where refiners each receive a specific amount, fuel oil permits are given to companies only after they have secured supplies and registered import volumes with the government, traders said.

"So it's a first-come first-serve approach," said the Shandong refinery official.

Independent plants ramped up imports of fuel oil earlier in 2023, snapping up cheap supplies from Russia and Malaysia, with volumes touching decade-highs during the second quarter.

(Reporting by Chen Aizhu, Muyu Xu and Jeslyn Lerh in Singapore and Andrew Hayley in Beijing; Editing by Florence Tan and Emelia Sithole-Matarise)