Middle East woes put Chinese independent refiners' appetite for Iranian crude in spotlight

The sharp escalation of tensions between Israel and Iran raises questions as to whether the flow of Iranian crude oil to China's independent refiners can continue uninterrupted, but analysts and trade sources are of the opinion that volumes are likely to remain intact for now.

While refiners across Asia have started to think of alternatives in the event the situation in the Middle East escalates, Shandong-based refiners were in no hurry to alter buying plans and step away from purchasing Iranian crude -- one of their most favored feedstock.

As a result, Iranian crudes will continue to flow to these independent refiners despite Iran's April 14 attack on Israel which raised concerns over the future procurement of such cargoes, refinery and trade sources told S&P Global Commodity Insights April 15.

"So far, purchasing interest of Iranian crude oil by Shandong refineries have not been greatly affected by Iran's attack on Israel. Iranian oil is only part of Shandong refineries' feedstock procurement, and the cargoes that have been ordered are shipped or delivered normally as of now," said Sijia Sun, associate director for downstream research and analysis at S&P Global.

Eyes on retaliation

Any retaliation by Israel, however, especially one that targets Iran's oil facilities, will have major implications for energy markets and could quickly embroil other neighboring producers, including Tehran's OPEC counterparts Saudi Arabia and the UAE, which previously found their refineries, pipelines and ports hit by Iranian-backed Houthi militia in Yemen.

Beyond an Israeli military strike, the US could tighten its sanctions enforcement on Iran, clamping down on oil exports that had been allowed to increase over the last year. However, such a move could result in added pressure on Saudi Arabia, the world's largest crude exporter, and other OPEC producers to raise output to mitigate any loss in Iranian crude.

G7 leaders, in a statement, offered their full support to Israel following the attack by Iran and said they were ready to take steps to respond to "further destabilizing initiatives".

"It is very likely that the US will impose further sanctions on Iran after the attack, which will make it more difficult to import Iranian cargoes," said an independent refinery source in China.

But independent refineries will likely continue to import crudes from Iran, since there will be no other big buyers for those barrels, according to a local analyst in Shandong.

In addition, independent refineries do not have numerous replacement options as there are not many sizeable amounts of attractively priced feedstocks that are able to fulfill the needs of Chinese independent refiners like Iranian crudes can.

China's independent refineries were estimated to have imported around 4.81 million mt (1.14 million b/d) of Iranian feedstock in March, comprising of crude oil and fuel oil, which fell 12.1% from 5.47 million mt a month earlier, according to S&P Global data.

But these import volumes were still lower than levels seen in October 2023 when Iranian suppliers started to raise prices while tightening oil exports.

Iranian cargoes, which are usually masked as blended crudes that originate from Malaysia, have been the main feedstock for independent refineries. These cargoes typically account for around 40%-50% of feedstocks imported by independent refiners, according to S&P Global estimates.

Iranian crudes getting expensive

"High offers for Iranian oil have already put pressure on the procurement of local refineries. We expect that Shandong refineries will comprehensively consider the purchase plan for Iranian oil based on the situation of sanctions against Iran, changes in shipping and freight fees, and price fluctuations caused by sanctions on other feedstocks," Sun added.

Iranian Light, which was offered at a discount of $4-$4.50/b to ICE Brent, DES early this week, was largely stable in recent months, according to trade sources.

As suppliers have been pushing prices higher by controlling sales, Iranian crude prices have risen sharply from discounts of $12-$13/b against ICE Brent since late October. Accordingly, independent refineries have reduced their imports from 6.22 million mt in October 2023, when Iranian suppliers started to raise prices. Nevertheless, imports still averaged 4.68 million mt over November 2023-March 2024, according to S&P Global data.

Relatively high prices for Iranian crudes have also forced independent refineries to seek other feedstock like fuel oil or alternative crudes, the sources said. In March, independent refineries raised fuel oil imports by 21.5% from a month earlier to a three-month high of 1.83 million mt, according to S&P Global data.