(Bloomberg) -- The torrent of Iranian oil that’s been gushing into China in recent weeks is crowding out imports from other nations and threatening to complicate efforts by the OPEC+ alliance to tighten supply in the global market.
China, the world’s largest crude oil importer, is currently buying close to 1 million barrels a day of sanctioned crude, condensate and fuel oil from the Persian Gulf nation, according to estimates by traders and analysts. That’s displacing favored grades from countries such as Norway, Angola, and Brazil, traders said, and resulting in an unusually quiet spot market.
Most refiners and traders around the world are reluctant to buy Iranian crude because of U.S. sanctions, which can result in repercussions like being cut off from the American banking system. However, the seemingly unstoppable rally in global crude prices is making the sharply discounted Iranian oil increasingly attractive to Chinese buyers including its independent refiners, which account for around a quarter of the country’s crude-processing capacity.
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While global benchmark Brent crude is trading near $70 a barrel due to improving demand and tighter supplies from OPEC+, a continuation or increase in the Iranian flows could stymie the alliance’s efforts to keep driving up prices.
Iran is a member of the Organization of Petroleum Exporting Countries, but is exempted from the supply restrictions. However, China’s preference for its cheap crude is displacing demand from OPEC countries like Angola as well as other producers like Norway and Brazil -- although the quality of oil from all of these countries is not identical.
As many as 10 million barrels of Angolan oil due for April export were still without buyers as of earlier this week, according to traders, compared with a typical month when such cargoes would have be sold out by now. Grades from Nigeria and Republic of the Congo have also struggled due a lack of buying interest, the traders said.
Three supertankers carrying oil from Norway’s Johan Sverdrup field have been floating off China for at least two weeks without discharging, shipping data show. Only 16 million barrels of North Sea crude left Europe for Asia in February, the least in four months, with the downward trend likely to continue in the short term, said traders involved in the market.
“With increased flows from places like Iran, and all the other grades’ arbitrage to China closed currently, the spot market is looking really weak,” said Yuntao Liu, an analyst with London-based Energy Aspects Ltd. “Between now and June to July, the teapots’ preferred grades such as West African crudes, Norway’s Johan Sverdrup and Brazilian crudes will be quite hard to sell.” China’s private players in the oil industry are often described as teapot refiners.
The Iranian oil flowing to China is a mix of barrels that are transported directly from the Persian Gulf, as well as Iranian-origin cargoes that are rebranded as Middle Eastern or Malaysian grades. Chinese imports of crude from the nation will average 856,000 barrels a day this month, the most in almost two years, data intelligence firm Kpler said last week.
Most of it is being purchased by domestic Chinese trading houses, traders said, as private and state-owned refiners try to distance themselves from dealings with the U.S.-sanctioned nation. It’s likely that these supplies will be temporarily held in onshore tanks before getting resold to local refineries on a later date, they added.
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These private processors, which are mostly based in Shandong province, have been known to refine Iranian and Venezuelan crude into fuel, and utilize sludgy, low-quality fuel oil as feedstock for their units.
The increased Iranian flows are happening as the administration of President Joe Biden attempts to revive a nuclear deal with Tehran. The Persian Gulf supplier exported around 2.5 million barrels a day of oil before the sanctions were first imposed in 2018. Iran is starting the year as the “biggest wildcard” for oil prices, Ed Morse, head of commodities research at Citigroup Inc., said in a note in January.
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