Iran's Negotiation Standoff with China over Oil Prices Impacts Global Markets

By IndraStra Global News Team

Cover Image Attribute: The file photo of the Persian Gulf Star Refinery in Bandar Abbas, Iran. / Source: M. Sadegh Nikgostar, Wikimedia Commons

According to an exclusive report from Reuters published last week, Iran has chosen to reduce its oil exports to China while demanding higher prices. The move has sparked concerns over potential impacts on global prices and the profitability of Chinese refiners, as well as broader questions about Iran's financial strategies amid international sanctions.

Background

China, a major consumer of Iranian oil, has seen a significant reduction in crude imports from Iran as Tehran insists on higher prices. Currently, Iranian oil constitutes around 10 percent of China's crude imports, and this sudden reduction in supply could exert upward pressure on global oil prices. The situation unfolded in early December when Iranian sellers informed Chinese buyers of a narrowing discount for December and January deliveries of Iranian Light crude, ranging between $5 and $6 per barrel below dated Brent. This marked a significant shift from the previously agreed discounts of around $10 per barrel.

Financial Implications for Iran

Iran's decision to demand higher prices comes at a critical juncture as the country grapples with economic challenges, including a currency in freefall. Despite the Biden administration allowing a surge in oil shipments from Iran to China, the country faces a revenue shortfall, and its currency has depreciated significantly, trading at 510,000 rials per dollar – a 12-fold decrease since 2018.
In late December, Iran announced $26.5 billion in oil export revenues for the past nine months, but analysis by Iran International suggests a more conservative estimate of around $22 billion. The move to raise oil prices appears to be a strategic financial decision, considering China is almost the sole buyer of Iranian oil since the imposition of full U.S. sanctions on Iranian crude exports in 2019.

Industry Perspectives

The Reuters report highlights the complexity of the situation, with a China-based trading executive characterizing Iran's move as an "extensive default." The decision to hike prices, reportedly originating from Tehran's headquarters, has led to a stalemate between Chinese buyers and Iranian suppliers. An executive at a Chinese intermediary that directly procures from Iran expressed uncertainty about the resolution, stating, "It's not clear how things would end. Let's wait a bit and see if refineries are willing to accept the new price."

Impact on Chinese Refiners

China, known for saving billions by purchasing discounted oil from sanctioned producers like Iran, Venezuela, and Russia, is now faced with a potential challenge to its cost-saving strategy. The abrupt reduction in Iranian oil supply, labeled by one industry executive as a "default," could be linked to the U.S. waiver on sanctions for Venezuelan oil in October, diverting shipments from Venezuela to the U.S. and India and subsequently elevating prices for China.
Notably, China's smaller independent refiners, often referred to as "teapots," have become Iran's primary clients since 2019. These teapots absorb approximately 90% of Iran's total oil exports, typically passing it off as originating from other countries. The recent disagreement over prices has put these teapots in a challenging position, with some accepting higher prices while others find it difficult to negotiate favorable terms.

Trade Dynamics

As a result of the ongoing standoff, both Iran's overall exports and China's imports of Iranian oil have declined. In December, China imported approximately 1.18 million barrels per day (bpd) of Iranian oil, down from 1.22 million bpd in November and a significant 23% decrease from October's record of 1.53 million bpd. These figures represent the majority of Iran's global seaborne crude exports.
While specific details on the extent of Iran's cutbacks to China remain unclear, tanker trackers suggest a noticeable decline in both imports and floating storage. Vortexa Analytics estimates China's imports at 1.23 million bpd for December, down from 1.52 million bpd in November. Meanwhile, Kpler reports an increase in floating storage off Iran and nearby waters, rising by about 2 million barrels to 15.5 million barrels over the past week.

Challenges and Future Scenarios

The disagreement over oil prices raises concerns about the resilience of Iran's economy amid tightening sanctions. With Washington imposing sanctions on more than 180 individuals and entities related to Iran's petroleum and petrochemical sectors since 2021 and identifying 40 vessels as blocked property, Tehran faces an uphill battle in navigating the intricacies of global oil markets.
The situation also poses challenges for China, which relies on discounted oil from sanctioned producers. The outcome of this negotiation standoff could impact China's broader energy security strategy and its reliance on countries like Iran, Venezuela, and Russia for a substantial portion of its crude imports.

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