China’s independent oil refiners, often referred to as “teapots,” are buying up unsold barrels of oil from the Middle East and Africa as Iranian crude becomes harder and more expensive to obtain. This change in purchasing habits comes as U.S. sanctions tighten, cutting off some key supply routes for Iran’s oil exports. The situation has created a noticeable shift in global oil trade patterns, with China turning to alternative sources to meet its demand.
Iranian Crude Supply Drops Amid Tightened Sanctions
China’s teapots are known for their preference for Iranian crude oil, which is usually cheaper compared to other sources. These refiners, located mostly in Shandong province, buy around 90% of Iran’s oil exports. However, Iranian oil has recently become less available and more expensive. One major reason for this is the broadening of U.S. sanctions in October, which targeted more tankers involved in transporting Iranian oil to China.
These tankers, known as the “dark fleet,” play a key role in shipping Iranian oil under the radar. They use tactics like ship-to-ship transfers, often in places like Malaysia, to disguise the oil’s origin. The expanded sanctions have made it harder for these tankers to operate, reducing the number of vessels available and tightening the supply of Iranian crude. As a result, Iranian oil exports to China have dropped by more than 10% this month compared to October, according to industry sources.
This scarcity has also driven up the price of Iranian oil, making it less attractive to the cost-conscious teapots. Some refiners are now stepping back from purchasing Iranian crude altogether, partly due to fears of U.S. sanctions affecting their access to international banking systems.
Middle Eastern and African Oil Fills the Gap
With fewer Iranian barrels on the market, China’s refiners are turning to oil from the Middle East and Africa. Recently, a large Chinese processor purchased about 10 million barrels of crude oil from Abu Dhabi and Qatar. These cargoes, set for delivery in December and January, were left unsold from previous trading cycles. By snapping up these supplies, China’s teapots have helped clear an overhang of unclaimed oil from the region.
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The surge in demand for West African oil has been particularly notable. Exports from this region to China are now at their highest level in over two years. This shift is partly due to the increased cost of Iranian oil, making West African crude a more appealing option despite the longer shipping distances.
This change in buying behavior has been fueled by Beijing’s decision to issue more import quotas to independent refiners. The government asked refiners to submit requests for additional crude purchases earlier this year and recently provided verbal approvals. Many refiners had already started buying in anticipation of these approvals. Collectively, refiners in Shandong province requested quotas for 28.5 million barrels of oil, valid until the end of the year.
U.S. Sanctions Ripple Through the Oil Market
The global oil market has been further shaken by concerns over how incoming U.S. policies might affect trade. Expanded sanctions against Iran have not only reduced supply but have also introduced risks for ports receiving sanctioned tankers. If vessels carrying Iranian oil are flagged and denied entry, their cargo could be stranded at sea. This threat has made some refiners and ports more cautious, pushing them to seek alternative sources of oil.
Additionally, the U.S. has increased scrutiny of ship-to-ship transfers, a process often used to re-label Iranian oil as Malaysian crude. These tactics are becoming riskier, creating more challenges for Chinese buyers looking to import Iranian oil.
At the same time, a spike in trading activity on Dubai oil contracts earlier this year led to an initial surplus of Middle Eastern crude that had gone unclaimed. With fewer Iranian options available, Chinese refiners have taken advantage of this surplus, purchasing oil from Abu Dhabi, Qatar, and other Middle Eastern suppliers.
China’s teapots are adjusting quickly to these changes, tapping into new sources to keep their refineries running. The combination of U.S. sanctions, tightened tanker availability, and shifting oil prices has created a dynamic and challenging environment for the global oil trade. For now, China’s independent refiners are making up for the shortfall in Iranian crude by turning to regions like West Africa and the Middle East, where supply remains more accessible.
