China seems to be resuming its imports of oil sanctioned by the US amid tensions in trade.
Vortexa reports that immediately after the Shandong shipping ban, and US sanctions against tankers engaged in Russian or Iranian trade, Shandong Teapot Refiners, the primary purchasers of sanctioned discounted oil, decreased their refinery runs. This was even true during Spring Festival preparations.
Emma Li, senior analyst at Vortexa, stated that Shandong’s crude oil inventories on the mainland rapidly decreased as teapots continued to use sanctions oil in spite of port discharge delays at terminals run by state-owned Shandong Port Group.
She added that independent oil terminals in key ports other than Shandong, such as Dalian and Shanghai, Zhoushan and Huizhou, began accepting oil from sanctioned ships.
The impact of these barrels is limited due to the small capacity of storage and additional costs of transportation between provinces.
These ports are unable to clear all the tankers that have been waiting at sea.
The Chinese SPG instructed their ports on January 7 to prohibit vessels that were sanctioned as a result of the US Office of Foreign Assets Control.
Shandong Port Group, a private company, transferred to private parties its ownership stakes in Dongying Port (the primary ESPO receiving center in Northern Shandong) in late January.
Iranian cargos arrive in Shandong
According to Vortexa, this strategic decision allowed cargo discharges from two tankers sanctioned, resulting in an increase of crude stocks at Dongying Port.
Other terminals in Shandong experienced operational delays during the same time period.
Li explained that although Dongying had the ability to adapt quickly, it was limited in its capacity to handle Iran’s VLCC-dominated cargoes because its berths were designed to accommodate tankers of 100,000 tons.
The primary Iranian oil-receiving ports also complied to SPG’s prohibition.
These constraints are responsible for the decline of Iranian crude oil imports to Shandong in January to less than 800,000 barrels a day, which is the lowest level since February 2023. There were also significant gaps in mid-month.
Late in January, there were calls for un-sanctioned VLCCs that could help offload stranded goods.
Li stated that at least eight VLCCs, either newly added to the Dark Fleet or idle from early 2024 onwards, have been resurfaced in order to facilitate STS transfers between Malaysia and China.
According to Vortexa estimates, China’s Iranian crude exports rebounded from 1.3 million barrels a day to over 1 million barrels a day during the period of February 1-20. The volumes bound for Shandong also exceeded 1 million barrels a day and slightly exceeded 2024’s average.
Russia changes its strategy
Vortexa reported that Russia quickly reestablished a fleet of non-sanctioned vessels for the Far East ESPO Crude, allowing Kozmino Port to fully recover in February.
According to the agency that tracks ships, between January 11 and the 20th of February at least 17 Aframax/LR2 tankers or Suezmax tanks entered the ESPO market.
The tankers were diverted either from sanctioned routes for crude oil, notably the Russia Baltics or from transporting clean products.
The rapid increase in ESPO’s exports has been aided by this influx.
The agency’s data showed that February is expected to see loadings of 920,000 barrels each day. This will be the same as the average for 2024, but it will surpass January, which was 860,000 barrels.
Li stated that “as Russia prioritizes ESPO for easier access to Chinese loyal buyers, more un-sanctioned ships are ballasting toward Kozmino. This reinforces a non-sanctioned route of supply and ensures continued stability in Russia’s Far East crude oil exports.”
According to Vortexa, the increased focus on ESPO caused a drastic reduction in non-sanctioned Aframax tanks for other Russian routes. This led to a substantial increase of crude oil held by sanctioned tankers.
The problem is most evident near Western ports, where tankers with Western approval are storing unprecedented amounts of crude oil that have limited acceptance chances by Asian buyers.
China could return to Russian Urals
China’s major oil companies, although they are relatively small buyers of Russian Urals crude and Arctic crude (270,000 barrels per day on average in 2024 as compared with Indian refiners), quickly found alternative sources after US sanctions were imposed to protect themselves against the risks associated with shipping.
Li stated that the purchases included late January/early February loadings of US WTI and Kazakhstan CPC Blend, as well as UAE Murban Crude. The combined volume is expected to offset all potential long-haul Russia oil barrel losses in the coming month.
Li says that China will likely return to buying Russian oil soon due to Beijing’s 10% tariff on US crude, imposed early in February.
The cost of Russian barrels is still competitive due to the tightening Brent-Dubai differential since mid-January, and Middle Eastern OSP increases.
According to preliminary data, Vortexa’s flow estimates suggest that Russian Urals crude and Arctic crude deliveries could increase by over 350,000 barrels a day between March and April.
Li said that “despite the initial US-Russian dialogue, it is expected of refiners to adhere to strict requirements for non-sanctioned tanks despite China’s continued dominance in Russian Far East crude oil imports.”
The demand for Russian barrels will likely remain low, since teapot refiners continue to prefer Iranian crude at deeper discounts.
The market sentiment was not significantly affected by fears of a possible resurgence in maximum pressure against Iran, particularly after the resumption of flows.
The likelihood that Iranian exports will continue to rise is low as the current costs of purchase are pushing key buyers beyond their affordability limit.
This article How China’s sanctions on oil imports have rebounded despite worldwide pressure first appeared at The ICD
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