Chinese refiners brace for lower Iranian oil volumes, but major disruptions unlikely

China’s crude imports from Iran are unlikely to face major disruptions despite the escalating conflict in the Middle East, but volumes could be set to fall and prices rise due to tighter supply, refinery and trade sources told S&P Global Commodity Insights on Oct. 9.

Senior trading officials with state-owned oil giants said that, following Iran's launch of nearly 200 ballistic missiles into Israel, the likelihood of an Israeli response remained high, and that this could have an impact Iran’s exports.

“On the surface, the situation looks like it is cooling down, but I don’t think it is the end as Israel is not the kind of nation to give up easily. It might either attack Iran’s refinery [infrastructure] and/or ports, or persuade the US to tighten sanctions,” said a Beijing-based senior trading official.

A Singapore-based senior trader with another Chinese state-owned oil company noted that "the US is more likely to control the situation as any escalation will cause oil prices to rally, which the US does not want to see."

Sources with China’s independent refineries said they were closely watching developments in the conflict but have not been drawing up immediate plans to secure alternative feedstocks.

One source with a Shandong-based independent refiner said that more stringent enforcement of sanctions could alter the outlook, however.

“If the US takes real action to sanction the banks [which offer financial services] to the Iranian flows, the market will change,” the source said. “There is still some room for the US to tighten control, as it [currently] keeps one eye closed on these transactions to stabilize oil prices."

Since sanctions were reimposed on Iran in 2018, Chinese independent refiners have been the main buyers of Iranian crude oil. In fact, these independent refiners almost fully rely on sanctioned crudes not only from Iran, but also from Russia and Venezuela, which are usually cheaper than non-sanctioned crudes. In addition, transactions can be carried out in Chinese yuan via local banks.

Iranian crude oil typically travels from Iran to Malaysian waters where it is blended, renamed and reloaded as Malaysian-origin crude oil.

Iranian supplies tighten

Iranian barrels accounted for about 53% of independent refineries’ crude imports in the first three quarters of 2024, data from S&P Global Commodity Insights showed.

According to Commodity Insights estimates based on various sources, their Iranian imports fell to about 1.53 million b/d (6.26 million metric tons) in September from the all-time high of 1.67 million b/d in August, although the September volume remains above the previous high of 1.43 million b/d in October 2023.

Meanwhile, S&P Global Commodities at Sea data shows that Iran's crude exports slumped to 237,000 b/d in the week to Oct. 6, the lowest weekly total in at least two years.

“Supply has become very tight. We have hardly seen offers this week,” a Shandong-based trade source said.

Meanwhile, the discount for Iranian Light narrowed to $3.5/b against ICE Brent crude futures on a DES Shandong basis as of Oct. 9 from about $4-4.5/b in late September, according to market sources.

Iranian Heavy was also talked at thinner discounts of around $6.5-7.5/b on the same basis, contracting from $7.5-8/b in late September, they said.

“The offers for Iranian crudes were getting higher before the week-long holiday [Golden Week] amid improving demand for feedstocks, and will possibly remain on an upward trend given the new tensions,” another source said.

Most of the independent refiners told Commodity Insights that they would maintain operations and feedstock flexibility in line with the changes in costs.

“Although domestic demand has improved month on month recently, the refineries do not look hungry for feedstocks as their profits remain much lower than in previous years,” said a Shandong-based analyst, adding that cutting utilization rates was an option for refiners when margins were low.

Russian crude alternative

Alternatively, faced with tighter availability of Iranian crude, Chinese independent refiners could increase purchases of Russian crude, predominantly ESPO.

Talks for December loadings of Russian ESPO have not started yet, although there is some expectation that the price might cool off a bit from November.

November-loading ESPO cargoes were largely concluded at a premium of around $0.2-0.5/b against ICE Brent on a DES Shandong basis, sources said.

On the other hand, independent refineries have not fully suspended the purchase of imported fuel oil cargoes, which will remain as another feedstock choice, according to sources.

Government changes to consumption tax regulations on fuel oil and bitumen blend that would increase the tax burden on independent refineries, significantly impacting their refining and profit margins, were expected to come into force this month, according to refinery and trade sources, although there has as yet been no confirmation of whether the changes have been implemented.

Russian M100 cargoes were heard done at a premium of $70-75/mt against the Mean of Platts Singapore assessments for 380 CST HSFO in late September, largely stable from previous trades.

Meanwhile, China’s foreign affairs ministry called on the leading countries with influence in the region to play a constructive role to prevent further escalation.

“China is deeply concerned about the turbulent situation in the Middle East, opposes intensifying contradictions and expanding conflicts, and calls on all parties to proceed from maintaining regional peace and stability and deal with the current situation in a calm, reasonable and responsible manner,” said Mao Ning, a spokeswoman with China’s Ministry of Foreign Affairs, on Oct. 9, as cited by Xinhua Agency.