China oil refiners cushioned from Iran conflict with ample Iranian, Russian supply at hand
Oil refiners in China will likely have no trouble weathering near-term disruption from the Iran conflict thanks to recent record shipments of Iranian and Russian crude and aggressive government stockpiling, traders said.
China is the world's top oil importer and its independent refiners, known as teapots, are the main market for Iranian oil that trades at a deep discount thanks to U.S. sanctions that scare off most buyers.
Chinese traders on Monday were mostly on the sidelines, seeking to digest the impact of the joint U.S.-Israel attack on Iran, Tehran's retaliatory strikes in the Gulf and the conflict expanding into Lebanon. Oil prices were up 9% on Monday
"The market is on edge and the situation could change by the day," said a senior trader with a large independent refiner.
A second trader at a Shandong province-based plant that processes Iranian oil said he "couldn't bring himself to bid" as he can't gauge how the situation will evolve.
Narrower discounts on Iranian crude? That said, there isn't much concern about supplies for March and April deliveries, with abundant Russian barrels as well as record volumes of Iranian oil on the water, the trader added.
His plant has also diversified into growing supplies from Russia and Brazil since the third-quarter of last year because Iranian oil, once the most profitable grade, has lost some of its price advantage.
While clear pricing indications have yet to emerge, some traders expect discounts for Iranian crude to narrow on expectations of tighter supply. One trader cited an offer at about ICE Brent minus $9 a barrel on a delivered basis, from minus $11 last week.
There is also market speculation that Iranian supplies could even eventually be removed from Washington's sanctions list if the military campaign results in the U.S. taking control of Iranian oil exports.
For the year to date, China's oil imports from Iran account for 11.5% of its total seaborne imports, with oil from Russia close behind at 10.5%, according to tanker tracker Kpler.
Kpler pegged Iranian oil loaded in February at 2.15 million barrels per day, the highest level since July 2018, while Vortexa estimated it at 2 million bpd. Iranian exporters were said to have rushed to ship oil ahead of a possible conflict.
Meanwhile, China's Russian imports are set to climb for a third straight month to a record in February after India slashed purchases. Early transactions for April-arriving shipments of Russian ESPO blend remained deeply discounted at ICE Brent minus $8-$9 a barrel.
Emma Li, Vortexa's China analyst, said abundant Russian and Iranian shipments mean teapots are unlikely to turn to the mainstream market in the near term.
Thanks to Beijing's stockpiling campaign, China has amassed about 900 million barrels under state-controlled stockpiles, or 78 days' worth of imports, according to estimates by Vortexa and traders.
In the event that Iranian oil no longer carries a sanctions discount, Chinese independent refiners are expected to return to their earlier buying patterns.
Then, Russian oil was their first choice while cargoes from Brazil, Canada and offshore Chinese production were also in favor, traders said.
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