The oil trade between China and Iran has hit a roadblock as Tehran withholds shipments and demands higher prices from its top client, impacting the world's largest crude importer. This move, which one industry executive referred to as a "default," may support global prices and strain profits at Chinese refineries.
Approximately 10% of China's crude imports come from Iranian oil, which reached a record level in October. The sudden reduction in Iranian oil supply could have significant implications, potentially causing global prices to rise and putting pressure on Chinese refiners.
This unexpected development may be a consequence of the U.S. waiver on sanctions for Venezuelan oil in October. The waiver redirected shipments from Venezuela to the U.S. and India, resulting in reduced supplies to China and elevated prices.
The National Iranian Oil Co, China's commerce ministry, and the U.S. Treasury Department have not yet responded to Reuters' requests for comment.
In early December, Iranian sellers informed Chinese buyers of narrowing discounts for December and January deliveries of Iranian Light crude to between $5 and $6 a barrel below dated Brent. This was a significant reduction compared to the previous discounts of around $10 a barrel in November.
Described as an "extensive default," the decision to raise prices appears to have come from Tehran, affecting both direct buyers and intermediaries. A Chinese middleman noted that Iran is withholding some shipments, leading to a standoff between Chinese buyers and Iranian suppliers.
It remains uncertain how extensive Iran's cutbacks to China are. Some Chinese refiners have accepted higher prices, while others are still negotiating. China has historically saved billions by purchasing discounted oil from sanctioned producers like Iran, Venezuela, and Russia, which together supply almost 30% of China's crude imports.
China's smaller independent refiners, known as "teapots," have become Iran's main clients since 2019. Teapots, which usually account for about 90% of Iran's total oil exports, are finding it challenging to negotiate favorable prices with Iran amid the current stalemate.
As the dispute over prices continues, both Iran's overall exports and China's imports from Iran have declined. China imported approximately 1.18 million barrels per day of Iranian oil last month, down from 1.22 million bpd in November and 23% lower than October's record of 1.53 million bpd.
The ongoing struggle over prices highlights the complex dynamics of international oil trade and the impact of geopolitical factors, including sanctions and waivers, on key players in the energy market.