In the past two months, Beijing has successively lost two important sources of cheap oil, Venezuela and Iran.
The joint military strikes by the United States and Israel against Iran are also expected to damage or weaken Iran’s crude oil exports, having a significant impact on China’s oil imports.
Former National Security Adviser Robert O’Brien under Trump administration stated in an interview on Fox Business Channel on Sunday (March 1st), “China has been purchasing Iranian oil at a great discount… Therefore, the President will hold significant trade leverage and negotiation advantage over China and Russia.”
For Chinese buyers, especially privately-owned refineries that have long benefited from cheap raw materials, the interruption of Iranian and Venezuelan oil supply is a series of bad news.
Since the beginning of January when Venezuelan President Maduro was detained by the United States, the U.S. has been trying to control Venezuela’s oil trade and restore its crude oil shipments to U.S. refineries.
The Vitol Group, one of the world’s largest commodity trading companies, has been offering discounted Merey crude oil to China, about $5 per barrel lower than the previous $15 per barrel discount, before Maduro’s capture.
Traders estimate that the amount of Venezuelan crude oil currently en route to China by sea can meet China’s domestic demand for one to two months.
Analysts predict that once this oil is used up, Beijing will have to purchase Venezuelan crude oil at international prices or use higher-priced alternatives. China is the world’s largest importer of crude oil.
However, in less than two months, Chinese refineries have also lost a key source of crude oil from Iran. About 90% of Iran’s approximately 1.6 million barrels of daily crude oil exports were shipped to China.
According to The Wall Street Journal, analysts say that China’s buyers of Iranian oil are mainly small independent “teapot” refineries.
Muyu Xu, a senior oil analyst at the commodity data provider Kpler, stated that approximately 190 million barrels of Iranian crude oil are currently being shipped at sea, equivalent to about five months of China’s demand for Iranian oil. This means that Chinese “teapot” refineries have five months to find alternative supplies.
Kpler data shows that even before the U.S. and Israel launched military operations against Iran last Saturday (February 28), Iran had accelerated the loading of crude oil onto tankers.
In recent months, China has been stockpiling oil, with a significant amount being purchased at deep discounts from Russia and Iran.
Michael Haigh, head of commodities research at French bank Societe Generale, stated that China has established strategic oil reserves of about 1.5 billion barrels, covering approximately 200 days of oil import demand.
Analysts believe that these Chinese refineries may have sufficient supply in the short term but will still need to shift to the mainstream market in the long run and compete with other buyers for oil.
A recent report from Bloomberg Economics stated that if Iran completely cuts off oil supplies, oil prices could rise by about 20%. Approximately 20% of global oil supply passes through the Strait of Hormuz, and if it is closed, oil prices could soar to $108 per barrel.
The report pointed out that if oil prices continue to rise, major oil-importing countries including China, Europe, and India will be affected, while oil-exporting countries like Russia, Canada, and Norway will benefit. As for the United States, although higher fuel costs squeezing incomes may impact consumers, its overall economy will be less affected due to being an oil-exporting country with shale oil resources.