Iran’s oil exports to China have experienced a significant shift, with discounts on Iranian crude reaching their tightest in nearly five years. The narrowing of these discounts is largely attributed to a reduction in oil exports, which has led to higher prices amid growing concerns that tensions in the Middle East may disrupt supply.
The price differential for Iranian Light crude has tightened to just under $4 per barrel below the global benchmark ICE Brent, while Iranian Heavy crude is discounted at around minus $7 per barrel. These price adjustments come after a period of widening discounts following 2019, when Chinese independent refiners—commonly referred to as “teapots”—began buying Iranian crude. At that time, state refiners in China reduced their purchases due to the reimposition of U.S. sanctions on Iran.
Iran’s oil exports account for about 10% of China’s crude imports, and a significant reduction in these flows or an increase in prices could further strain the already low production rates at independent Chinese refineries. These refineries are already operating under tight margins due to sluggish demand for fuel in the country.
Trading sources mentioned that the discounts on Iranian Light crude were around $5 to $6 per barrel earlier this year. However, as shipments from Iranian export terminals like Kharg Island dropped significantly in October, the price pressure has intensified. Some of the decline in exports is linked to concerns about potential attacks on Iranian oil facilities, particularly by Israel, although these fears have had less of an impact than anticipated.
Loadings at Kharg Island dropped by about 340,000 barrels per day in October, with shipment volumes falling by a third compared to the usual rate. A pipeline leak at the Kharg Island anchorage area also contributed to the slowdown, although it is unclear whether this issue has been resolved.
Shandong-based refineries, which are among the largest buyers of Iranian crude, are currently facing one of their most challenging periods since they began importing oil in 2016. Many of these refiners are operating at less than 50% capacity, with some running at a loss, especially in diesel production.
Iranian oil is often disguised as being sourced from countries like Malaysia or Oman in order to evade U.S. sanctions. Despite this, China maintains that its oil trade with Iran complies with international law. The ongoing geopolitical tensions and fluctuations in oil supply continue to affect both the global and regional oil markets, making it a critical issue for buyers and sellers alike.
