China's small independent refineries to continue favoring Iranian crudes in 2024

The volume of Iranian crudes flowing into China's small independent refineries in 2024 are likely to be similar to the volume of imports in 2023 despite the producer's attempt to raise prices, possibly narrowing refiners' margins, amid a tight supply of Russian and Venezuelan crudes.

Given the sanctions still in effect on Iranian barrels, the pressure other oil importers are likely to face should they have to compete with these small independent refiners for non-sanctioned crudes eases when the latter purchase Iranian oil.

"It's very unlikely for the US to lift sanctions on Iranian crudes given the current geopolitical tensions in the Middle East," a refining source in Shandong said. "And while the US presidential elections are underway in November 2024."

These small independent refineries, located at Shandong with capacities of between 40,000 b/d and 214,000 b/d, imported a combined 56.35 million mt, or 1.13 million b/d, of crudes from Iran in 2023, up 9% from a year ago, S&P Global data showed.

"Currently, there is no verified buyer for substantial volumes of Iranian crude oil beyond the independent refineries in China," said Shi Fenglei, S&P Global Commodity Insights' downstream research and analysis director. "At the same time, Iranian crude remains one of the most cost competitive for China's private sector."

The recent tensions between Israel and Iran-backed Hezbollah, coupled with attacks by other Iran-backed rebels on ships plying the Rea Sea and US oil interests in Iraq deepened the hostile relationship between the US and Iran, a Singapore-based analyst said.

These geopolitical tensions have led Chinese independent refiners to believe that Iran is unlikely to find more buyers in the international market apart from them.

"Current importers in China and Syria are relatively immune from US secondary sanctions due to a lack of exposure to the US market and financial system," said Paul Sheldon, chief geopolitical advisor with S&P Global Commodity Insights. "Importantly, we do not expect other buyers to step in without formal sanctions relief or an explicit blessing from the US, neither of which appear realistic under current geopolitical circumstances."

Avoid further cuts in cheap feedstocks

Increasing competition for sanctions-free Venezuelan crude supplies, which placed an upward pressure on prices, ensured that the small Chinese independent refineries remained dependent on Iranian crude given its lower costs compared with other barrels.

In 2023, 98% of feedstock imports by small independent refineries -- around 2.4 million b/d -- came from Russia, Venezuela and Iran, S&P Global Commodity Insights data showed. The use of sanctioned crudes allowed these refiners to make up to Yuan 1,500/mt ($28/b) in profit in March 2023.

S&P Global expected the waiver on PDVSA's oil sanctions to be extended for another six months from April as signals failed to indicate an eagerness by the Biden administration to reimpose blanket oil sanctions.

Meanwhile, an official with CNPC told S&P Global that it was difficult to boost Venezuela's production despite the dispatch of upstream experts to the Latin American country.

Due to limited availability and an increase in the number of competitors, the arrival of Venezuelan-origin feedstocks at small independent refineries slumped 49% year on year in the fourth quarter of 2023 to 3.36 million mt (268,000 b/d), S&P Global data showed.

According to market sources, Venezuelan heavy crudes prices rose to ICE Brent minus $7-$8/b during the week of Jan. 15-19, 2024 from discounts of about $20/b in January 2023.

Therefore, "the [small] independent refineries would secure Iranian barrels to avoid any further reduction in cheap feedstocks, which offers an opportunity to push up prices for Middle Eastern crudes," the Singapore-based analyst said.

Prices rise

As of Jan. 19, trading and refining sources said Iranian Light was offered at a discount of around $4.50-$5/b against ICE Brent crude futures on a DES Shandong basis. This discount narrowed sharply from around $12-$13/b in late October.

"There has been some back-and-forth between Iranian crude suppliers and the independent refineries, pushing up prices; but along the way prices eventually went up," a trading source said, adding that some refineries were not in a hurry to buy feedstock as oil product demand is expected slow during the Lunar New Year holiday in mid-February.

Iranian crude suppliers have been defaulting their cargoes since November 2023 in an effort to push up prices by limiting supply, market sources said.

"We heard there were some Iranian crudes stored in floating storages in the Middle East, but those barrels will end up in China," another market source said.

According to S&P Global's Shi, the discounts that Iranian crude oil was fetching was dependent on the grades' relationship with competing crudes.

"While the narrowing discount for Venezuelan crude offers an upside for Iranian oil, these upsides can be capped by the competitive dynamics between Iranian and Russian oil," Shi added.

But "if suppliers can limit the Iranian barrels to about $5/b below the price of Russian ones, it will allow Iranian crudes to remain competitive," a Shanghai-based trader said.

Iranian Light crude, with an API of around 33.6 and a sulfur content of 1.46%, was the main crude that independent refineries bought, in addition to other medium or heavier grades. The light distillates yield from Iranian crudes are comparable with that of Russian ESPO, making it a good reason to buy Iranian barrels, refining sources said.

ESPO was offered at ICE Brent futures minus about 50 cents-$1/b over the week of Jan. 15-19, according to trading sources, compared with discounts as deep as $9.50/b in January 2023.

China's independent refineries imported 1.47 million b/d of Iranian crude in October 2023, a 15-month high, following a 31.2% month-on-month drop to 1.01 million b/d in November before rebounding to 1.32 million b/d in December, S&P Global data showed.