China's appetite for Iranian crude is unlikely to slow as the US mulls new sanctions on Iran's oil exports in the wake of its drone attacks on Israel, with Chinese independent refiners finding ways to keep buying those cargoes, refining and trading sources told S&P Global Commodity Insights.
An escalation in tensions between Israel and has raised concerns about the continuity of Iranian crude oil flows to China's independent refiners, but analysts and trade sources say that volumes are likely to be unaffected for now.
After Iran's strikes on Israel, the US imposed new sanctions on Iran targeting its unmanned aerial vehicle production, while hinting at further possible sanctions on its oil exports.
Market participants have questioned how possibly tighter US sanctions could threaten oil supply and potentially disrupt flows.
"I am not surprised that the US will enforce further sanctions on Iranian crude exports after Tehran's attack on Israel, and I don't think this will alter the whole procedure," said a Shandong-based source with an independent refinery.
Iranian cargoes, which are usually masked as blended crudes that originate from Malaysia, have been the main feedstock for independent refineries. These cargoes typically account for 40%-50% of feedstocks imported by independent refiners, according to S&P Global estimates.
S&P Global collects information from trade and independent refinery sources, Kpler, shipping brokers and port sources, and S&P Global Commodities at Sea, and corroborates that information with sources with direct knowledge of the matter.
Currently, almost all Iranian cargoes are paid in Chinese yuan instead of dollars.
"Further sanctions will surely make it more difficult to import Iranian cargoes, and more companies involved in the transactions might be sanctioned. But it could also lead to lower prices of the barrels and encourage buying," a second refiner said.
"So far, Iranian flows to China are going on as usual," said Sijia Sun, associate director with S&P Global's downstream research and analysis. "But looking forward, the impact will depend on how US executes the sanctions."
Independent refineries will watch the developments before changing their crude buying plans from Iran, as current demand for feedstock has been relatively tepid due to weak refining margins, refining sources said.
Iranian Light crude was largely offered at a discount of $5-$5.50/b to ICE Brent, DES late in the week ended April 19, that was slightly more than a discount of $4-$4.5/b a few days earlier, the sources said.
"The margins for cracking the grade have been weak," said another refinery source.
The independent refineries in Shandong province, the main buyers of Iranian cargoes, were generally maintaining low operation rates because of weak margins, leading to slower demand for feedstock.
The utilization rate at Shandong independent refineries was around 54.8% as of April 18, slightly higher than a week earlier, according to data from local energy information provider OilChem.
China's independent refineries were estimated to have imported about 4.81 million mt (1.14 million b/d) of Iranian feedstock in March, comprising crude oil and fuel oil, down from 5.47 million mt a month earlier, according to S&P Global data.
The imports were also lower than levels seen in October 2023 when Iranian suppliers started raising prices, while tightening oil exports.