China’s independent refiners face crude supply crunch as US blockade chokes Iranian oil

China's independent oil refiners are bracing for further cuts to processing runs as a US naval blockade on Iran and Washington's broader sanctions campaign choke off the discounted crude supplies that have long sustained their operations.

The small private refineries, known as "teapots," confront what Bloomberg described as a "twin challenge": Iranian crude loadings have collapsed under the US blockade while Venezuelan flows have been redirected, and surging global prices — with Brent crude nearing $100 a barrel — are eroding already thin margins.bloomberg

Iranian Supply Collapse

The US naval blockade of Iran, imposed in April, has devastated Tehran's crude exports. Iran's crude and condensate loadings fell from about 2 million barrels per day in March to between 220,000 and 255,000 barrels per day in August, a decline of roughly 87% to 89% over five months, according to Chosun Biz. Iranian authorities have confirmed they have been unable to move oil past US warships enforcing the blockade.biz.chosun+1

On September 4, the US Treasury sanctioned Turkey's Golden Global Yatirim Bankasi and two subsidiaries under its "Operation Economic Outcast" campaign, accusing the bank of facilitating tens of millions of dollars in transactions for Iran's Revolutionary Guard. The action targeted a payment network that had routed proceeds from Iranian crude sales through China to Turkey, further closing off the financial pathways teapots relied upon to purchase discounted Iranian oil.cnbc+2

Sinopec Crowds Out Smaller Refiners

With Iranian barrels scarce, Chinese refiners have rushed to secure Russian crude — but teapots are being outbid. Sinopec, the world's largest refiner, purchased an estimated 10 to 15 cargoes of October-delivery ESPO crude, equivalent to 235,000 to 353,000 barrels per day, according to Reuters. Including other Russian grades, Sinopec's October purchases may exceed 20 cargoes. The buying spree has pushed ESPO premiums to as high as $10 per barrel over Brent for November China-delivery cargoes, a sharp reversal from the discounts that prevailed earlier this year.reuters+1

Squeezed on price, teapots have turned to alternatives from Brazil, Canada, and Iraq. But Iraqi Basra Medium arriving in China recently traded at about $8 per barrel over Brent — a level at which oil traders say it is difficult to turn a profit even after selling refined products. Refiners short on inventory may simply lower run rates rather than buy expensive crude.biz.chosun

Dwindling Buffer

China has been drawing on strategic petroleum reserves estimated at about 1.17 billion barrels to cushion the supply shock, but that buffer will erode as refinery demand picks up heading into winter. Russell Hardy, CEO of Vitol, the world's largest independent oil trader, said the gap between China's crude imports last year and this year is unsustainable and predicted imports will need to normalize toward year-end to meet seasonal fuel demand. If US pressure on Iran persists, the cost burden on teapots — and competition for every available barrel — will only intensify.biz.chosun