US tightens the screws on Iranian oil, drawing China into the fray

Seeking to bring an end to the two-month-old Middle East war and gain the upper hand in upcoming trade talks with China, the US has tightened enforcement on Iranian oil shipments and trade, aiming to pressure both Tehran and Beijing.

Key Takeaways:

• US sanctions on the 400 kbd Hengli Petrochemical refinery—the largest target so far—are unlikely to derail its operations in the near term.
• The blockade on Iranian oil shipments has slowed new loadings, but the 155 mb of Iranian crude already outside the Gulf of Oman suggests no imminent supply disruption for Chinese buyers.
• Beijing’s push for independent refiners to maintain run rates exposes them to potential US sanctions, as plants have limited feedstock alternatives under the current supply and margin environment.

China has so far largely stayed on the sidelines of the US–Israeli war with Iran—at least on the surface—even as many countries, including the US, hope Beijing will step up as a mediator to help bring the conflict to an earlier end. In 2023, China brokered the restoration of diplomatic ties between Saudi Arabia and Iran.

Beijing may be weighing its strategic options, given its complex relationship with Washington and its deep economic and political ties with both Iran and the GCC. One thing is clear: a standstill in Hormuz traffic, along with the growing risk of a global economic downturn driven by energy supply shortages and high inflation, is in no way in China’s interest. The question is when—and to what extent—Beijing chooses to get involved.

While there may already be far more happening behind the scenes, the latest US blockade on Iranian shipping and sanctions on a major Chinese refinery appear to be pushing Beijing to take a more active role—while also giving it additional leverage ahead of the scheduled Trump–Xi meeting next month.

Over the weekend, the US sanctioned the 400 kbd Hengli Petrochemical refinery over its purchases of Iranian oil, the largest Chinese refinery by capacity to be added to its blacklist to date. While Hengli has denied trading with Iran in response to the sanctions and a sharp drop in its share price, some market participants suggest the Dalian-based independent refiner is currently running entirely on Iranian and Russian feedstocks.