China Is Buying Up So Much Sanctioned Iranian Oil It’s Clogging Up Its Ports
Record amounts in 2021, thanks Uncle Sam for the discount
China is gorging on sanctioned Iranian oil — with imports forecast to more than double this month from February — as other countries hold off purchases for fear of incurring the wrath of the U.S.
Iranian shipments to the province of Shandong, home to a quarter of China’s refining capacity, have surged so much this month they’re causing congestion at ports and filling up storage tanks, traders and analysts said.
Oil from the Persian Gulf nation is heavily discounted due to the American sanctions that were first imposed in mid-2018. In China, it usually goes for $3 to $5 barrel less than benchmark Brent crude, according to traders, who say that’s prompting some local companies to stock up as global prices rise and economic activity picks up following the Lunar New Year holidays.
Chinese imports of Iranian crude will rise to 856,000 barrels a day in March, the most in almost two years and up 129% from last month, according to Kevin Wright, a Singapore-based analyst with Kpler. His estimates include oil that’s undergone ship-to-ship transfers in the Middle East or in waters off Singapore, Malaysia and Indonesia to obscure their origin.
Most refiners and traders are reluctant to purchase Iranian crude for fear of repercussions that can include being cut off from the American banking system and having cargoes seized. Tehran has used aggressive marketing as it tries to raise export income and boost an economy reeling from the sanctions.
“The surge is related to lower costs but also, politically, to a sense that this might be an interim period between the outgoing administration and the Biden administration figuring out its position on Iran,” said Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies. “Iran is certainly part of the downside risks to oil prices, alongside Libya and shale to a certain degree.”
Oil prices have leapt from less than $40 a barrel at the end of October as major economies rolled out coronavirus vaccines and OPEC+ kept supply in check. Brent briefly topped $71 this week after a drone and missile attack on Saudi Arabia’s largest oil export terminal, which the kingdom blamed on Yemen’s Iran-backed Houthi rebels.
Chinese fuel consumption had already recovered to pre-virus levels last year, but dipped over the last few months amid a resurgence of Covid-19 in parts of the country. It’s now growing on the back of strong factory activity and infrastructure building that left Beijing blanketed in smog this week.
The waiting time for tankers looking to offload in Shandong was estimated at 12 days last week, compared with eight the week before, according to Kpler. Oil inventories at ports in the province climbed to a one-year high last month, data from industry researcher SCI99 showed.
China’s imports of crude oil climbed to an average of 11.1 million barrels a day in January and February, up more than 20% from December, according to Bloomberg calculations.
Iran-origin crude purchased by China is sometimes labeled Omani or Middle Eastern oil, or Malaysian Blend. China imported more than 12 million metric tons of crude from Malaysia in 2020 and 2019, around twice as much as in 2017 before the U.S. sanctions were imposed, customs data show.
Iran has quietly moved record amounts of crude oil to top client China in recent months, while India’s state refiners have added Iranian oil to their annual import plans on the assumption that U.S. sanctions on the OPEC supplier will soon ease, according to six industry sources and Refinitiv data.
U.S. President Joe Biden has sought to revive talks with Iran on a nuclear deal abandoned by former President Donald Trump in 2018, although harsh economic measures remain in place that Tehran insists be lifted before negotiations resume.
The National Iranian Oil Company (NIOC) has started reaching out to customers across Asia since Biden took office to assess potential demand for its crude, said the sources, who declined to be named because of the sensitivity of the matter.
The sanctions caused a precipitous drop in Iranian exports to China, India, Japan and South Korea since late 2018. Those measures, and output cuts by fellow OPEC+ producers, have led to tight supplies of Middle East sour crude in Asia, the top global oil market. Asia imports more than half of its crude from the Middle East.
“They talked to us. They said: ‘very soon they hope to resume oil supplies.’ We said: ‘Inshallah’,” said one source at an Indian refiner. “Inshallah” is an Arabic term that means “God willing,” used to express that the speaker hopes something will happen.
GRAPHIC: China’s Iranian oil purchases hit record in early 2021 –
Iran moved about 17.8 million tonnes (306,000 barrels per day) of crude into China during the past 14 months, with volumes reaching record levels in January and February, according to Refinitiv Oil Research.
Of these, about 75% were “indirect” imports identified as oil from Oman, the United Arab Emirates or Malaysia, which entered China mainly via ports in eastern Shandong province, home to most of China’s independent refiners, or Yingkou port in northeastern Liaoning province.
GRAPHIC: China’s indirect Iranian oil imports by ports –
The remaining 25% of imports were marked as official purchases for China’s Strategic Petroleum Reserves, Refinitiv said, as Beijing maintains a small purchase volume despite U.S. sanctions.
GRAPHIC: Oman, Malaysia UAE crude flows to China –
“Volumes started to surge from the last quarter of 2020, with Shandong province as the top receiving region which indicates independent plants are the main consumers,” said Emma Li, a Refinitiv crude flows analyst.
Tankers carrying Iranian oil typically switch off their transponders when loading to avoid detection, but then become traceable via satellites near ports in Oman, the UAE and Iraq. Some transfer part of their cargoes to other ships near Singapore or Malaysia before sailing to China, Li said.
Reuters is unable to identify the end buyers for these cargoes.
Without commenting directly on the oil transactions, the Spokesman’s Office of China’s Foreign Ministry said: “Iran is a friendly nation to China and the two nations have maintained normal exchanges and cooperation. The cooperation between China and Iran under the framework of international laws is both reasonable and legitimate, and deserves respect and protection.”
NIOC declined to comment. An official at the country’s Oil Ministry said, ”When the unjust U.S. sanctions are lifted, Iran will be able to sell its oil to any country, and I can assure you that many contracts will be signed.”
Geneva-based tanker tracker Petro-Logistics said Iranian oil loadings in January exceeded 600,000 bpd for the first time since May 2019, a sign that the end of Donald Trump’s term may be changing buyer behavior.
Indirect shipment arrivals in February, including those waiting to discharge off Chinese ports, reached nearly 850,000 bpd, beating the daily record of 790,000 bpd set in April 2019, according to Refinitiv and Chinese customs data.
Chinese customs data showed on Sunday that crude imports rose 4% annually in the first two months of this year. It will release details for the breakdown by country of origin this month.
“Iranian stuff started to slip into Shandong from late 2019… started with some cash-stripped refiners which processed oil first before paying for the cargo,” said an independent Chinese trader familiar with some of the transactions.
Most of these transactions were settled in Chinese currency or euros to circumvent U.S. scrutiny, the trader said.
The record imports have weighed on prices for competing medium and heavy grades from other Middle East producers, traders said.
“While it does not seem that the sanction will be lifted anytime soon, Iran has resurfaced,” another trade source said.