Okay, I went ahead and actually checked the code 
Indeed it’s as I thought, it iterates through your shortcut bar inventory. (whenever you equip an item it gets moved to your equipment inventory, hence why it’s not repairing equipped items).
And it’s actually not that bad… it repairs all of them to full regardless of how much they’re broken (as long as it’s not completely broken) and only reduces their max durability by 1% regardless of the amount of damage repaired on them. Also uses 1 oil per item, regardless of the amount repaired… So if you have like in-between star metal weapons and whatnot, it’s perfect and will save you a lot of materials.
I’ll definitely be using it from time to time.