U.S. curbs on Iran drive China to chase pricey Russian crude

Following the United States' actions imposing sanctions on Iran, China's refining industry is facing challenges in securing affordable crude oil. The U.S. has blocked both maritime shipments of Iranian crude and the payment network in China for crude sales proceeds, effectively curbing the flow of cheap Iranian oil. Sinopec, China's largest state-owned refiner, has responded by purchasing large volumes of Russian crude as a substitute, tightening the race for alternative supplies.

Other Chinese refiners, known as "teapots," had primarily purchased Iranian crude but are now diversifying their sources, turning to Brazil, Canada, and Iraq as demand for Russian crude rises and prices surge.

As of October 8, Sinopec's substantial purchases meant that October-delivery ESPO, a Russian Far East grade, effectively wrapped up earlier than usual in mid-August. The November China-delivery ESPO carried a premium of up to $10 per barrel over Brent, the international benchmark. This price shift is a result of the U.S. actions targeting both the maritime and payment routes for Iranian crude, making it more difficult for China's refiners to procure cheap Iranian oil.

On September 4, the U.S. Treasury added Turkey's investment bank to its sanctions list, alleging involvement in moving proceeds from Iranian crude sales in China to Turkey.

Chinese refiners are feeling the strain as Iranian barrels are blocked and Russian crude becomes scarce. Smaller refiners, or "teapots," are struggling to secure Russian crude and are expanding their sourcing to Brazil, Canada, and Iraq. The difficulty in securing Russian crude has pushed teapots to pay higher prices, creating a price premium of up to $10 per barrel over Brent for November China-delivery ESPO.

This shift in sourcing and pricing reflects the challenges China faces in meeting its refining needs amid the U.S. sanctions on Iran.