Independent oil buyers in China have turned to Iraqi crude oil due to U.S. sanctions against Iran. Private refiners, including smaller refiners in Shandong province, have purchased Basrah heavy and medium crude oil for delivery in November at a premium of $18 per barrel above the ICE index. These transactions reflect an urgent need for sourcing alternatives rather than an increase in Chinese oil demand.
Oil Supply Situation and Impact of Sanctions
At least 50 tankers, primarily carrying Iranian crude oil, are stranded off the coast of China. U.S. sanctions are aimed at pressuring Tehran to end its seven-month-long war. Chinese state refiners have secured most of the available Russian crude oil, which has led to increased costs for independent refiners.
Read more: Farah Ali Khani Appointed as Head of the National Iranian Oil Company
Impact of Supply Shortages on Independent Refiners
With new crude oil import quotas issued by Beijing, some Shandong refiners may reduce their inventories by the end of this month and may have to compete for limited options. According to Moyo Xu, senior crude oil analyst at Kpler, "To avoid shutdowns or significant reductions in operational rates, refiners need to secure alternative sources as soon as possible." Supply shortages have pushed some products toward Basrah crude oil with high sulfur content, which is typically overlooked due to the lower costs of Iranian oil and ESPO crude from Russia.
Increased oil flow from the Middle East has made access to Iraqi crude oil easier, as Gulf producers are moving more oil through the Strait of Hormuz. Producers in the region are offering more discounts to maintain their market share.
Russian crude oils remain expensive, with ESPO crude trading nearly $30 per barrel above Brent. Iraqi crude oil buyers include private refiners in Shandong province and some large independent refiners. Iraqi crude oil is marketed by trading companies including Vitol Group, Trafigura Group, Mercuria Energy Group, and TotalEnergies SE.
Before the sanctions were implemented, Iran supplied over 1 million barrels of oil per day to independent Chinese refiners, who were the main buyers due to significant discounts on sanctioned barrels.
Read more: Escalation of Iran's Attacks on Tankers in the Strait of Hormuz Ahead of Oil Export Resumption · Iraq Reduces Dinar Rate by 14.5%
