China’s seaborne crude imports fell from August’s year-to-date high to 9.7 mbd in September, as refiners turned to onshore crude inventories to sustain operations. Despite seasonally strong motor fuel demand during autumn, a slowing economy and tight clean fuel export quotas have weighed heavily on China’s crude throughput. Implied refinery runs in September were 15.3mbd, a 5% y-o-y decline.

From January to September, China imported 4.2mbd of crude via the Strait of Hormuz, accounting for 43% of its seaborne crude. This includes about 1.35mbd of Iranian crude and condensate, a 27% y-o-y increase, as more Chinese refiners turned to discounted Iranian feedstocks to improve refining margins.

As China emerges as Iran’s top trade partner, absorbing more than 95% of its oil exports, a blockade of the Strait of Hormuz is considered unlikely. Such an action would cause significant economic instability and strain Iran’s crucial relationship with China.

China’s demand slowed even before the recent escalation of tensions
China’s Iranian crude imports hit a record high of over 1.65mbd in August, as refiners ramped up operations ahead of the “golden September and silver October.” However, Shandong teapots saw weak margins in September, particularly with the launch of Yulong’s 400kbd Yantai refinery in northern Shandong. Additionally, the new consumption tax, effective from Oct 1, curbed teapots’ appetite for Iranian high-sulphur fuel oil.

With Yulong aiming for full operation by the end of the year—despite seasonally weak domestic fuel demand during winter—Shandong teapot refiners, long-time customers of Iranian oil, are expected to cut run rates in Q4, even without potential supply disruptions.

Iranian crude imports already fell to 1.4mbd in September and are expected to slip further below the year-to-date average in October. Iranian residual fuel imports also dropped below 20kbd in September, compared to 50-100kbd in the previous eight months.

Can China absorb more Iranian crude?
The new Yulong refinery is currently processing non-Iranian Middle Eastern crude and Russian Far East ESPO crude. Saudi Arabia could emerge as a key supplier, with Aramco having a preliminary agreement to acquire a 10% stake in Yulong in exchange for a crude supply deal, limiting the refinery’s reliance on Iranian imports.

Chinese oil majors, who manage the country’s strategic oil reserves (SPR), remain hesitant to handle Iranian crude since sanctions were reimposed in 2018. The new SPR stockpiling mandate, aimed at adding around 60mb of crude by March 2025, is unlikely to benefit Iran in the absence of official direction from Beijing.

Nevertheless, Iran has expanded its market share in China by attracting private refiners outside Shandong province.

This has led to a surge in crude reloads and intra-flows from Shandong to other provinces, with refiners increasingly discharging and clearing customs at Shandong ports to navigate heightened surveillance. In September, Iranian imports into Shandong stayed above 1mbd, though down from August’s peak of 1.3mbd, while crude reloads from key Shandong ports remained above 330kbd.

Iran’s crude and condensate exports reached post-sanction highs of around 1.7mbd in May-July, likely near maximum export capacity as onshore inventories were rapidly drawn down during this period. In August and September, exports slowed to 1.4mbd, with stock drawdowns coming to a halt.

If Israel strikes Iran’s refineries or power plants, Iran may increase its crude and condensate exports to the seaborne market. However, Chinese refiners would likely demand deeper discounts on delivered cargos. Additionally, the demand for ship-to-ship transfers may rise, further limiting Iran’s oil revenue growth.

Can China afford to lose Iranian barrels?
While unlikely, if Israel targets Iran’s key ports, such as Kharg Island—where over 90% of Iran’s oil is exported—disruptions could be significant. A slowdown at Kharg is already visible, with only two VLCCs loaded between October 1-10, compared to an average of 1.1 VLCCs per day in the first nine months of the year.

Iranian oil in floating storage outside the Strait of Hormuz stood at 40mb as of Oct 6, equivalent to one month of China’s imports. Meanwhile, Shandong crude stocks held in non-major commercial tanks declined to a two-year low as of Oct 11, indicating low Iranian stock levels at teapots’ doorway.

Traders raised premiums for DES-Shandong cargos by $1.5/b in September, ahead of escalating tensions, and are eyeing an additional $2/b increase as delays in loadings are likely to be prolonged.

The current 1.4mbd of Iranian oil demand from Chinese private refiners shows varying tolerance to supply disruptions. Vortexa estimates that 400kbd of this demand is resilient and can be replaced by non-discounted barrels, while the remaining 1mbd is more price-sensitive and would likely lead to refinery run cuts.

If Iranian supplies are lost, Chinese refiners are expected to turn to the next available discounted barrels, with Russian crude being the most viable option. In turn, Saudi-led OPEC countries may fill the gap left by Russian crude for buyers outside China.

Source: Vortexa