China-Iran Oil Trade Stalemate: Tehran Demands Higher Prices, Impacting Global Supply Dynamics

The dynamics of the global oil market have encountered a stumbling block as negotiations between Iran and China, two major players in the industry, reach an impasse. Sources intimate with refinery operations and trade patterns have revealed that Iran has halted shipments while pressing for higher prices from China, which happens to be Tehran's premier client. This development poses potential ramifications for the international pricing landscape and profitability margins for Chinese refineries.

The disruption of Iran's oil supply is significant, given that it constitutes about 10% of China's overall crude imports, reaching a historical peak in October. This contraction of supply could very well buttress global prices. Moreover, this conundrum mirrors what an industry insider had labelled a "default", partly prompted by the October US waiver on sanctions on Venezuelan oil. This waiver redirected Venezuelan oil cargoes primarily toward the United States and India, thereby inflating prices for the Chinese market as their previous source depleted.

Despite reaching out, neither the National Iranian Oil Co, the Chinese commerce ministry, nor the US Treasury Department has commented on the matter.

Negotiations took a problematic turn when Iranian sellers signaled a reduction in their previous discounts for December and January deliveries — slashing them to $5-$6 a barrel below dated Brent. This adjustment stood in stark contrast to the generous $10 discounts that were secured in November. The decisive instructions to elevate prices reportedly originated straight from Tehran, as supplies were also withheld from intermediary entities.

Several Chinese purchasing entities, ranging from state-owned behemoths to smaller independent refineries colloquially referred to as "teapots", are embroiled in this pricing squabble. These "teapots", constituting a significant client base for Iranian oil since 2019, now face a conundrum as they strive to negotiate feasible terms.

Iran's stringent stance has left Chinese buyers in a predicament regarding price negotiations, consequently making them confront tighter margins. At least one Shandong-based refinery, amid these tensions, succumbed to the heightened prices, acquiring a shipment within the narrower discount range of $5.50 to $6.50 on a delivered ex-ship basis. The tendency towards even narrower discounts persists, with the most recent offer heard being at a $4.50 discount — substantially higher than last year's average discount for Iranian Light crude, which was estimated at about $13.

The stalemate has had tangible effects not only on the negotiation table but also on trade volumes. China's imports from Iran fell marginally from November, and noticeably from October's peak. Iran's export figures have also suffered concurrently, with seaborne shipments dipping as estimated by industry trackers. The escalating volume of floating storage off Iran points towards an inability to offload these cargoes in the face of pricing disputes.

Analysts and traders have asserted that Iran's ambitions to align its pricing with Russian export grades may be overly optimistic, failing to consider the differing sanctions frameworks applied to each country.

The US, since 2021, has imposed sanctions on an extensive list of individuals and entities linked to Iran's petroleum sector. In contrast, the primary measure on Russian oil has been a $60-a-barrel price cap designed to penalize Moscow for its military actions in Ukraine. Notably, buyers such as India have consistently paid above this threshold, suggesting different market responses and sanctions effects between Iranian and Russian oil exports.