China’s private oil refiners could seek to buy more cargoes whose origin has been obscured as they prepare for fresh US sanctions on Iranian exports, ensuring crude continues to flow to the world’s top importer.

The US House of Representatives passed tougher measures against Iran over the weekend in response to an attack on Israel, promising to broaden the scope of restrictions with a series of measures targeting the country’s exports that could become law as soon as this week.

China has long been wary of being caught up in the US sanctions net and the latest steps extend to foreign ports, vessels, and refineries that knowingly engage in the Iranian oil trade. Still, Iran’s exports to China are not expected to fall away.

So-called teapot refiners — private outfits clustered in Shandong province and the leading beneficiaries of US sanctions on Iranian exports — are already bracing for the increased scrutiny. According to refinery executives and traders supplying them, that will likely include buying oil that has been manipulated en route, usually via ship-to-ship transfers around Malaysia and Singapore, or near Fujairah in the Gulf of Oman.

Some may temporarily back away as a precaution, but pressure on profits is already high with margins barely at breakeven levels, traders say. Buyers may instead seek better terms as the hurdles accumulate for Iranian exporters, even sidestepping middlemen in order to lower prices. 

Teapot refiners have become all but reliant on less expensive crude from sanctioned regimes in recent years, emerging in particular as the most important buyers of Iranian oil. That’s been possible thanks to sidestepping measures including the use of yuan transactions, a domestic clearing and settlement system — known as CIPS — and local financial institutions isolated from large commercial players, such as Bank of Kunlun. 

Still, US officials can trace at least some physical shipments of Iranian oil with the help of ship-tracking and satellite data, and identify the entities aiding in these flows. The bigger question is whether Washington is willing to enforce the sanctions and live with the consequences, including higher gasoline and diesel prices in an election year. 

Added Risk

The additional measures certainly add a “new element of risk” at a time when crude is pricier and gasoline prices are up almost 30% year to date, oil analysis firm Rapidan Energy Group wrote. Others, including consultant Energy Aspects Ltd., question whether Washington will actually move ahead and tighten its grip, risking fuel inflation and disgruntled voters.

According to official Chinese customs data, no Iranian oil has been imported by China since mid-2022. 

In reality, China has taken an average of 1.2 million barrels a day of crude from Iran since the beginning of 2023, according to data compiled by Kpler. Much of these flows are passed off as cargoes of other origins, such as Malaysia, where these shipments are typically transferred from one tanker to another, allowing vessels to shuttle back to Iran for more crude.

Any new restrictions, if introduced, would affect exports amounting to between 200,000 and 500,000 barrels a day, Amrita Sen, co-founder and director of research at Energy Aspects, told Bloomberg Television earlier this week. Iranian crude and condensate exports stood at 1.5 million barrels a day in March, based on Bloomberg ship-tracking data.