Iran has deepened the price discounts offered on its crude sales to China, with discounts now over six dollars a barrel below Brent, WPB says. This is a dramatic reversal from earlier this year when the price margin was merely three dollars in March and five dollars at the start of September.
The widening margin comes as standalone Chinese refiners, widely referred to as "teapots," are grappling with higher inventories. The Shandong province, home to the refiners, now has the highest-ever level of crude oil inventory. The excess has added to the pressure on prices and has hindered the profitability of the smaller refiners.
While that is happening, geopolitical headwinds are also heightening the challenge. A series of recently imposed U.S. sanctions are targeting Chinese oil storage facilities and several independent refiners blamed with the reception of Iranian crude shipments. Those actions have slowed deliveries to targeted terminals, making it more difficult for some refiners to get hold of the cheaper Iranian barrels they depend on. Vessel-tracking data show a distinct reduction in flows to those terminals over recent weeks.
Yet, robust storage levels and an absence of government-allotted import quotas to the independents have overshadowed the supply disruption. Thus, the Iranian oil discount continues to deepen, underlining the delicate balancing act between sanctions pressure and China's domestic market dynamics.
Most recent figures have Shandong commercial crude reserves at nearly 293 million barrels as of late August—a jump of perhaps twenty million barrels since early July. This pace indicates the velocity with which stockpiling has been in progress, with China gradually adding nearly one million barrels a day to its reserves over the past few months. Analysts calculate that if oil prices remain solid or continue to fall, the country is likely to be able to sustain this accumulation phase until 2026, and with it effectively reshaping regional supply-demand balances.
China's thirst for cheap oil thus has presented both strengths and vulnerabilities. Although deeply discounted Iranian crude offers refiners short-term financial reprieve, the interplay of swelling inventories, increased sanctions, and limited import licenses can leave the industry susceptible to increased depth of volatility in the long run. For Iran, the greater depth of discounting is both a demonstration of its commitment to maintaining markets while facing sanction pressure and the risks of increasingly relying on one dominant buyer.
By WPB
Bitumen, Crude, Oil
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