Chinese refiners resell Mideast crude at premium as Houthi blockade tightens supply

Several Chinese refiners and traders have begun offering Middle Eastern crude cargoes they purchased weeks ago for resale to buyers in South Korea and Taiwan, capitalizing on surging spot premiums driven by an escalation in the U.S.-Iran conflict and fresh threats from Yemen's Houthi movement.

State-owned Unipec China Petroleum & Chemical Corporation, the trading arm of Sinopec, and CNOOC, along with independent refiner Shenghong Petrochemical Jiangsu Eastern Shenghong Co., Ltd., are among sellers offering cargoes at premiums of around $6 a barrel over the Dubai benchmark, according to trade sources. The sellers plan to replace the resold barrels with cheaper Russian ESPO Blend crude, which has been trading at discounts to international benchmarks in recent weeks.Reuters+2

Houthi Blockade and Iran Tensions Tighten Supply

The resale opportunity emerged after spot premiums for Middle East crude benchmarks jumped to six-week highs on July 21, following the Houthi declaration of a naval embargo on Saudi Arabia. Yemen's Houthi leader Abdul Malik al-Houthi threatened that all Saudi oil facilities would be targets if Riyadh escalated its involvement in the conflict.Reuters+2

The maritime embargo compounds disruptions from the broader U.S.-Iran war. The United States revoked a temporary sanctions waiver on Iranian oil earlier in July, effectively banning transactions after July 17. Iran had previously instructed the Houthis to be prepared to close the Red Sea's Bab el-Mandeb Strait to shipping if the U.S. attacked Iran's power infrastructure.Reuters+2

A Market Turned Upside Down

The arbitrage reflects a dramatic reversal in oil market dynamics. In early July, when a fragile ceasefire held and the Strait of Hormuz was passable, Chinese independent refiners were snapping up discounted Middle Eastern crude at bargain prices. Shenghong Petrochemical purchased Upper Zakum crude from the United Arab Emirates, while others bought Saudi and Iraqi grades.Bloomberg+1

Now, with the renewed escalation pushing Dubai spot premiums sharply higher, refiners who locked in purchases at lower prices can profit by selling to Northeast Asian buyers scrambling for supply. Russia's ESPO Blend, which had flipped to discounts of $3 a barrel to ICE Brent in early July, offers a cheaper alternative for Chinese refiners to meet their own feedstock needs.Reuters+1

The International Energy Agency warned this month that world oil demand is on track to fall for the first time since 2020, as the conflict continues to disrupt production and exports across the Middle East. According to JP Morgan, global oil demand remains about 4 million barrels per day below levels at the start of the war.Al Jazeera English+1