Iran’s crude oil exports to China have fallen ever since the Ukraine war as Beijing now imports heavily discounted Russian oil. Reports indicate that this has led to nearly 40 million barrels of Iranian oil being stored at sea without enough buyers. In May approximately 20 vessels were anchored near Singapore, however oil vessels have been anchored for several months. In light of Russia facing US and EU sanctions, cheap Russian crude oil has entered Asian markets and China has pounced on this opportunity, prompting Iran to also slash its oil prices.
The United States and the EU are now trying to find mechanisms to restrict Russian oil exports. US Treasury Secretary Janet Yellen recently suggested China place a cap on the price of Russian oil during a virtual meeting. China is the world’s largest crude oil importer and Beijing in recent months has increased its crude oil imports from Russia causing grave concern for Washington. Reports indicate that the EU also recently reached an agreement to bar companies from insuring and financing Russia’s energy trade. Moscow will face an added challenge once the insurance and reinsurance ban becomes more effective as oil tanker owners will refuse to do business if they are not offered the necessary insurance.
China has become the largest buyer of Iranian oil and as per some reports, Iran’s exports increased to 870,000 barrels a day in the initial months of this year. When the Trump administration imposed sanctions on Iran, several countries were pressured to completely halt or gradually minimize oil imports from Iran. China meanwhile continued to import the sanctioned oil despite warnings from Washington. The US Senate has expressed strong concerns to the Biden administration regarding China’s role in helping Iran to circumvent US sanctions. The United States also recently added Chinese enterprises to the sanctions list to build pressure on limiting China-Iran oil trade. Traders expect China to increase refining output to 2 million bpd once it completely eases the coronavirus pandemic restrictions as domestic oil demand is likely to spike.
The energy market dynamics that have prompted Chinese refiners to buy more Russian oil and Iran to slash its oil prices are related to domestic and global developments. Firstly, as Chinese businesses have started to rebound, oil demand has also increased in China in recent months. This has prompted China to import more discounted oil, especially amid efforts to kickstart business post lockdown restrictions. Reports indicate that China’s total imports from Russia surged 80 percent to $10.27 billion becoming Moscow’s largest buyer amid the sanctions it faces. Secondly, ever since China liberalized its oil industry in 2015 smaller private oil refineries called “teapots” have been carving up a bigger market share.
Reports indicate that these smaller refineries now handle nearly one-fifth of China’s crude imports and the government has accentuated efforts to monitor and regulate quotas in this regard. The “teapot” refiners lack the credit needed to ensure long-term agreements and contracts with suppliers which makes them more reliant on the spot market for their purchases.
As China is now easing its coronavirus restrictions and taking necessary measures to stimulate its economy, “teapot” refineries are buying cheap crude oil from Russia to increase their profit margins, especially after the impediments they faced in the energy market because of the pandemic. Thirdly, as Iran has been largely unsuccessful in customer diversification, it has become overly dependent on China for oil exports.
The Chinese market is crucial for Iran as non-state refiners in China are willing to buy Iranian oil in huge quantities amid US sanctions. This has resulted in a lopsided dynamic favoring Beijing. Now with cheap Russian oil entering Asian markets, Iran has no choice but to slash its oil prices heavily to withstand the competition it is facing from Moscow in the energy market. Fourthly, Iran’s crude oil is medium heavy like Russia’s and the main buyers of such crude are Asian countries including India, China, Japan and South Korea.
In these countries, most of the refineries are calibrated for medium heavy crude, hence Iranian crude can be fairly easily substituted with Russian crude. As long as the United States does not lift the sanctions on Iran it will be extremely difficult for Tehran to participate in international energy trade and amid a severe economic crisis in the country, it is vital for Iran to keep its oil trade afloat at any cost, especially as the inflation rate could cross 50 percent soon. Hence, Iran’s largest buyers shifting to buy Russian oil comes at a heavy price for Iran.
Some reports reveal that the “teapots” have provided Iran with at least $22 billion in revenue ever since the Biden administration came to power. As the United States has imposed sanctions on Chinese state-owned companies, smaller non-state enterprises like the “teapots” have enabled Beijing to import Iranian oil. These refiners tend to move towards cheaper oil to maximize their profits. Hence, if Russian oil continues to be sold at a heavily discounted rate, Iran will likely be forced to slash its prices as well, as long as the demand for oil in China increases and there are no further stringent lockdown restrictions imposed by the government in case of a spike in coronavirus cases.