China backs off peak Iranian crude buys, but a steep drop looks unlikely

China’s imports of Iranian crude came off their peak in April, pressured by tightening US sanctions and elevated feedstock inventories. While Washington is expected to maintain its “maximum pressure” campaign on Iranian oil trade despite ongoing nuclear talks, China’s purchases are set to decline further in May—though a dramatic plunge appears unlikely.

Key Takeaways:

• Jinrun terminal has emerged as a new receiver of Iranian crude cargoes from US-sanctioned vessels, following the blacklisting of Huizhou Huaying and Huangzeshan.
• Iranian oil floaters are accumulating off northern China as Dongying, the main hub for handling sanctioned vessels, nears its maximum operational capacity.
• Chinese teapots are expected to continue purchasing Iranian crude, supported by improved refining margins and declining feedstock inventories.
• Beijing is unlikely to offer open support to sanctioned teapots unless the domestic economic situation worsens or Sino-US tensions escalate further.

China’s imports of Iranian crude oil plunged by a whopping 470 kbd m/m in April to 1.3 mbd, down from a five-month high recorded in March. While the intensified US sanctions on Chinese refineries and ports seem to have curbed some buying and made new orders more cautious, we expect Iranian crude shipments to China to decline further in May—though still far from the levels the Trump Administration once aimed to eliminate.

As part of its “maximum pressure” campaign on Tehran, Washington has sanctioned two Chinese independent refineries—Shouguang Luqing Petrochemical and Shengxing Chemical—along with two oil terminals (Huizhou Huaying and Huangzeshan) and dozens of crude carriers, all within the first 100 days of Trump’s return to office.

The sanction on the first Chinese refinery sent a shockwave through the market, prompting teapots to keep their heads down and shy away from placing new orders. But it didn’t take long for them to return, partly driven by improved refining margins as rival state-owned refiners entered heavy maintenance and the collapse in oil prices. Iranian Light crude is reportedly trading at around -$1.8/bbl against ICE Brent, down from -$0.8/bbl prior to the sanction on Luqing.

Market insiders told Kpler that Shouguang Luqing remains operational and has switched its bank account to facilitate incoming and outgoing payments. However, US sanctions have deterred state-owned and major private trading firms from purchasing refined products from Luqing, while also complicating its direct import of feedstocks.

Refiners remain largely refraining from buying April- and May-arrival cargoes, as they are still sitting on relatively high feedstock inventories. China imported as much as 1.8 mbd of Iranian crude in March, driven by a buying spree in January and February after teapot refiners were granted new crude import quotas and anticipated tightening US sanctions. That said, these refiners will need to return to the market for new cargoes once their stockpiles run low, likely from mid-May onward.

China’s primary refining utilisation rate by refiner type, %

Source: Oilchem

While nuclear talks between Iran and the US have appeared constructive so far, Washington is expected to maintain its “maximum pressure” campaign on Tehran until a deal is secured—a prospect that seems unlikely in the near term given the decade-long standoff. In this scenario, additional sanctions on vessels, ports, and even buyers are expected. However, we still anticipate a resilient flow of Iranian crude to China, potentially hovering around 1-1.2 mbd, unless the US targets major Chinese refining complexes or key port hubs—an action that would almost certainly provoke strong pushback from Beijing and further escalate the already heightened tensions between the two countries.

A significant rebound in Iranian crude arrivals also seems unlikely, given the logistical constraints on Iran’s shipping capacity and the limited number of Chinese terminals willing to receive sanctioned tankers following US sanctions. In April, Dongying terminal in Shandong and Jinrun terminal in Zhejiang appeared to be the only facilities willing to receive Iranian crude from OFAC-listed tankers, following Washington’s recent blacklisting of Huizhou Huaying and Huangzeshan in the past few weeks. Therefore, unless Iran manages to expand its fleet with more non-sanctioned vessels—or additional privately operated oil terminals in China are willing to take the risk—there will be a cap on the volume of Iranian crude the country can receive.

As of this writing, approximately 7.14 mb of Iranian crude oil are sitting in the Yellow Sea as floating storage. Of that volume, only two tankers, carrying a combined 1 mb, have not yet been sanctioned by the US. The number of Iranian oil floaters off northern China has surged over the past three weeks, as Dongying—also a key hub for discharging Russian crude—approaches its maximum capacity to handle sanctioned tankers.

Iranian crude oil floating storage by current sea, mb

Source: Kpler

At this stage, we don’t expect Beijing to openly support Chinese teapots in purchasing Iranian oil or in operations after being added to US sanctions lists—despite its repeated criticism of the sanctions on Chinese firms and its framing of trade with Iran as “normal economic cooperation.” Part of the reason lies in Beijing’s broader objective to streamline the domestic refining sector by phasing out outdated capacity operated by teapots. That said, it will be careful not to appear as though it is yielding to US pressure, particularly amid ongoing Sino-US trade tensions. However, should the domestic economic outlook deteriorate, or external geopolitical tensions escalate, Beijing may feel compelled to step in to shield the teapots, which contribute to local employment and tax revenue.

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