The ripple effects of U.S. pressure on Iran are spreading to China's refining industry. After the United States blocked maritime shipments of Iranian crude, it recently sanctioned a workaround payment network in China for proceeds from crude sales, cutting off the flow of cheap Iranian oil.
In response, China's largest state-owned refiner, Sinopec, has been buying large volumes of Russian crude as a substitute, intensifying the race to secure supply. China's smaller private refiners known as "teapots," which had mainly purchased Iranian crude, also moved to secure Russian barrels, but as demand surged and prices rose, they are widening their sourcing to Brazil, Canada, and Iraq.
As of Oct. 8 local time, according to a compilation of reports from Reuters and the oil trading industry, Sinopec's large-scale buying meant that transaction for October-delivery ESPO (Eastern Siberia–Pacific Ocean pipeline crude), a Russian Far East grade, effectively wrapped up about a month earlier than usual in mid-August. Prices offered for November China-delivery ESPO carried a premium of up to $10 per barrel over Brent, the international benchmark.
This shift stems from U.S. actions that, after targeting the maritime "sea route" for Iranian crude, also blocked the "money route" for sales proceeds, making it harder for China's refiners to procure cheap Iranian oil and pushing them to secure alternative supplies. On Sept. 4, the U.S. Treasury's Office of Foreign Assets Control (OFAC) added Turkey's investment bank Golden Global Yatirim Bankasi and two asset management and leasing subsidiaries to its sanctions list. The Treasury believes the bank was involved in moving proceeds from sales of Iranian crude generated in China to Turkey through Iran's informal "rahbar network." Funds transferred to Turkey were converted locally into cash and gold. Golden Global Yatirim Bankasi denied the allegations and said it would pursue legal action.
Earlier, the United States also pressured the maritime route that carries Iranian crude to China. When it reinstated the Iranian maritime blockade on July 14, crude newly loaded in Iran found it difficult to exit the Strait of Hormuz and head to China. Iran's crude and condensate loadings fell from about 2 million barrels per day in March to 740,000 barrels in July and 220,000–255,000 barrels in August, a drop of about 87%–89% in five months.
◇ Chinese refiners seek alternative supplies as Iranian barrels are blocked
The first to be hit were the teapots. Smaller than state-owned refiners and sensitive to costs, they had actively bought Iranian, Russian, and Venezuelan crude, which were discounted due to Western sanctions. Until the U.S. maritime blockade, Iranian crude was a core supply source.
But securing Russian crude to replace Iranian supplies has also become difficult. With far greater purchasing power, Sinopec has been scooping up Russian barrels, reducing volumes available to teapots and pushing prices higher. According to oil traders cited by Reuters, Sinopec is estimated to have bought 10–15 cargoes of October-delivery ESPO, equivalent to an average of 235,000–353,000 barrels per day. Including other Russian grades, some expect Sinopec's October purchases to exceed 20 cargoes.
Squeezed out on price, teapots are looking for alternative supply. Some refiners purchased crude from Brazil, Canada, and Iraq. Recent Iraqi Basra Medium arriving in China traded about $8 per barrel over Brent. At that level, the oil trading industry says it is hard to turn a profit even after selling refined products. Firms short on inventories may lower refinery run rates rather than buy expensive crude.
◇ China leans on strategic reserves; Shanghai crude prices also rise
China has curtailed crude imports and drawn on large strategic reserves to hedge against a spike in global oil prices. The country's crude inventories are estimated at about 1.17 billion barrels. Thanks to reserves, it has avoided immediate large-scale purchases despite supply shocks from the Middle East, but as refinery runs increase, this buffer will inevitably erode.
Domestic crude prices in China are also under upward pressure. Crude futures traded on the Shanghai International Energy Exchange (INE) have risen sharply. The INE's main crude futures contract climbed from 635.1 yuan per barrel at the end of last month to 688.5 yuan on Oct. 7. When converted to dollars, the price recently topped Brent, the international benchmark, entering a "premium" zone for the first time since May. That means Chinese crude is pricier than the benchmark, a price signal showing that refiners in China face tighter conditions in sourcing crude.
Global oil prices are also climbing. On Oct. 8 local time, North Sea Brent settled at $97.92 per barrel, the highest since July 23, Reuters reported. With Middle East supply disruptions persisting and competition in China for Russian barrels intensifying, additional upward pressure could build on Asia's spot crude prices.
Russell Hardy, CEO of Vitol, the world's largest independent oil trader, said the gap between China's crude imports last year and this year is not sustainable and predicted China will normalize crude imports toward year-end to meet winter fuel demand. If U.S. pressure on Iran persists, competition among Chinese refiners for Russian crude and the expense burden on teapots will likely increase.