Independent Chinese Refineries Scale Back on Buying Iranian Crude for February

According to trading sources, independent refinery companies in China are refraining from purchasing Iranian crude oil for the month of February due to a dispute over pricing and terms, marking the second consecutive month of disagreement.

These companies may be forced to reduce their operating rates next month as their profits decline amidst the slowdown of industrial activity in China, which typically sees slow demand for oil during the lunar new year season.

Independent Chinese refineries are the largest buyers of Iranian oil, which is priced at significant discounts due to US sanctions. However, the trade has been hindered since late December after Iran blocked shipments and demanded higher prices.

Three informed trading sources stated that sellers are offering discounts of around $4.50 per barrel for Iranian light crude oil directed to China in February, compared to discounts of $5 to $6 in December and $10 in November.

At the same time, major oil producers in the Middle East are offering significantly reduced official selling prices to buyers with fixed-term contracts due to concerns over weak demand and surplus supply.

The Iranian oil sellers are also seeking advanced payments, and in some cases, full payment, before unloading the shipments, which increases financing costs for the refineries. Previously, sellers used to demand payment of around 10% before delivery.

The Chinese buyers are not in a rush to utilize their import allocations and are requesting more from Beijing, resulting in a sharp decline in trading. One trading source mentioned that the Iranian oil market is now very sluggish.

Victor Katona, Head of Crude Oil Analysis at Kpler, stated that total Iranian crude oil exports reached their lowest levels since March 2023, recording 1.1 million barrels per day in January, down approximately 250,000 barrels per day from December.

He added that it is very clear that the slowdown in Chinese demand led to this decrease. Data from Kpler revealed that more than 90% of Iranian crude oil is shipped to China, with the rest going to countries such as Syria. Margins for independent Chinese companies in Shandong province, which is the oil hub in China, fell to 130 yuan ($18.12) per ton last week, the lowest level in two months, according to JLC, an energy consulting company.

This reflects the increase in feedstock costs and weak fuel demand. The first trader stated that it is difficult to determine which side will give in first to break this deadlock. He added that in the long term, it is challenging to find a significant alternative to Iranian oil because it remains the cheapest oil in the world.

Data from JLC showed that the average operating rates for independent refineries in Shandong reached 62.8% since the beginning of January, compared to 64% in December and around 70% in October. These companies typically decrease their operating rates during the lunar new year season, which begins this year on February 10th. (Reuters)