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China’s Iranian oil imports ease on poor margins, lure of Russian oil

China's Iranian oil imports ease on poor margins, lure of Russian oil

In April, China’s Iranian oil imports fell short of peak levels expected in late 2021 and early 2022, as demand from independent refiners deteriorated as fuel margins were slashed by COVID-19 lockdowns, as well as rising imports of lower-cost Russian oil.

The reduction of Iranian oil purchases, which account for about 7% of the world’s crude imports, comes as Western negotiators have given up hope of renewing a 2015 nuclear deal, while high oil prices have encouraged Iran to take its time returning to an agreement.

A resurrected nuclear deal would allow Iran to increase oil shipments to prior clients in South Korea and Europe, in addition to China, which has been Iran’s top customer for the past two years.

Meanwhile, Russian crude is moving to China, displaced by weakening demand in Europe due to mounting concerns about sanctions related to Russia’s invasion of Ukraine. On February 24, Russia launched a “special operation” in Ukraine, sending tens of thousands of troops into the country.

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China bought approximately 650,000 barrels per day of Iranian petroleum in April, according to preliminary estimates from Vortexa Analytics, somewhat less than the over 700,000 bpd discharged in March.

Another data analytics business, Kpler, estimated Iran’s April shipments at 575,000 barrels per day, down from an average of 840,000 barrels per day in the first quarter of 2022, though the agency expects to revise up April levels in the coming weeks.

China’s independent refiners, commonly known as teapots, are major Iranian oil purchasers, with most of them based in the eastern province of Shandong. As surging prices, tighter import quotas, and COVID lockdowns crushed margins, refiners have curtailed crude imports since February, running at less than half capacity in April, dealers claimed.

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“Independent factories curtailed capacity in February, causing Iranian barrels to have difficulty finding buyers,” said Emma Li, a China analyst with Vortex.

At least six cargoes of Iranian oil totaling eight million barrels have been stranded for more than three months off the coasts of Shandong and Zhejiang, according to Li.

China’s seaborne oil imports from Russia, on the other hand, increased by 16 percent in April from March to around 860,000 BPD, the highest level since December, according to Refinitiv data.

Though the Far East export-grade ESPO mix dominated Russian supplies in April, the prospect of increased Urals cargoes being forced out of Europe is luring the teapots.

According to dealers, at least one teapot refiner purchased a June-arriving Urals shipment at a discount of $6 to $7 per barrel to Brent on a delivered basis.

In comparison, Iranian crude traded about $5 per barrel under Brent.

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“Teapots are suffering from poor margins and a glut of oil. Dealing with Iranian and Russian barrels carries risks, so refiners would be cautious and choose the less expensive supplies with greater margins “said a trading executive at a refinery in Shandong.

Iranian fuel has being labelled as oil from Oman, the United Arab Emirates, and Malaysia and exported to China to dodge US sanctions, dealers have alleged.

Despite being aware of the Chinese transactions, US President Joe Biden’s administration has decided not to impose penalties on Chinese persons and corporations.

Requests for a response from China’s foreign ministry were not returned. A request for comment from Iran’s oil ministry was likewise ignored.

In December and January, Chinese customs records showed imports of 260,000 tonnes (1.9 million barrels) of Iranian oil, the first official figure in a year.

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