China to resort to obscure oil amid US sanctions

China’s private refiners may resort to purchasing obscured-origin cargoes to sustain crude inflow amid impending US sanctions on Iranian oil exports, Bloomberg reported on Wednesday.

The US House passed stricter measures following an attack on Israel, targeting Iranian exports, awaiting Biden’s approval. Despite the threat of penalties, Chinese imports from Iran are anticipated to persist.

Teapot refiners, primarily in Shandong province, are preparing for heightened scrutiny, likely resorting to acquiring manipulated oil via ship-to-ship transfers to circumvent restrictions. Pressure mounts on profits, with margins near breakeven. Some may pause operations, while buyers seek favourable terms amidst rising hurdles for Iranian exporters, possibly bypassing intermediaries.

Reliant on cheaper sanctioned crude, teapot refiners have evaded restrictions through yuan transactions, CIPS clearing, and local banks. Though US officials can track shipments, enforcement’s extent remains uncertain, impacting fuel prices in an election year.

The added risk prompts concerns amid soaring fuel costs. Chinese customs data conceals Iranian imports since mid-2022, but actual inflows average 1.2 million barrels daily, often disguised as other origins. New restrictions could affect exports of 200,000 to 500,000 barrels daily, with total Iranian exports at 1.5 million barrels daily in March.

Goldman Sachs predicts no major supply disruptions, noting Iran’s existing severe sanctions and the impact of broader sanctions depending on execution.