US push to cripple Iranian oil flows begins to show some serious effects

Tougher US sanctions on tankers involved in Iranian oil flows have tightened shipping capacity, particularly during the second leg of the journey, where vessels transport cargoes from the STS hub in the EOPL region to China. This has significantly driven up Iranian oil prices and prompted some refiners to seek alternatives.

• China’s November Iranian crude oil imports fell to a 4-mths low
• US sanctions on Iranian tankers caused a mismatch in shipping capacity on the two-part journeys; Floating storage climbs
• Some Chinese refiners sought alternative crude supplies in case Iranian shipments tightened further
• Iranian oil prices soar on higher risk premiums; Syrian flows expected to redirect to China

China’s imports of Iranian crude oil and condensate dropped to a four-months low of 1.31 Mbd in November, a sharp drop of 524 kbd m/m. This decline stemmed from a confluence of factors: reduced shipments from Iran in October as geopolitical tensions flared, a tightening domestic energy crunch, and mounting shipping difficulties driven by tougher U.S. sanctions. While we estimate Iran's oil output to remain steady at about 4.1 Mbd and domestic crude demand to increase only marginally by around 20 kbd during the winter season to approximately 2.2 Mbd, oil outflows should be able to stay at around 1.8-1.9 Mbd under normal circumstances. In fact, Iran’s crude exports has rebounded to 1.8 Mbd (+309kbd m/m) in November.

However, the expansion of U.S. sanctions on tankers involved in Iranian oil trades over the past two months is expected to slow down Iran's crude exports, as Tehran now faces challenges in mobilizing enough tankers for shipments amid growing concerns from buyers about being seen as violating the sanctions. Except for a few direct shipments from Iranian oil terminals to Chinese ports, most cargoes are first transported to waters off Malaysia or Singapore (EOPL), where they are transferred to another vessel via ship-to-ship (STS) operations before completing the rest of the journey. In some cases, a third tanker is involved, acting as a shuttle vessel to ferry oil between the tanker from Iran and the one bound for China, further disguising the origin of the cargoes and making them appear more legitimate.

Of the 147 tankers involved in Iranian crude oil shipments so far this year, 45 were added to the U.S. sanctions list in 2024. Of these, 34 tankers were used to transport oil either directly from Iran to China or from EOPL to China, suggesting that Washington aims to cripple the key pillar of Tehran's oil flows. Iranian oil has been sold to Chinese buyers on a delivered basis since the imposition of U.S. sanctions, requiring sellers to arrange shipments and deliver the cargo to the designated port. Despite Beijing’s rejection of US unilateral sanctions on Iranian oil, Chinese ports and financial institutions remain cautious about discharging cargoes from sanctioned tankers and issuing payments to their sellers.

Tankers involved in Iranian crude oil shipments in 2024 by current routes, count

Source: Kpler

One exception is the Iranian oil carried by the VLCC Phonix, which was sanctioned by OFAC on December 3 while nearing its destination, Rizhao Port, to deliver oil to a Chinese private refinery. The cargo was successfully discharged on December 6, less than 48 hours after Phonix arrived at the port. While some interpreted it as China disregarding U.S. sanctions, several market insiders told Kpler that this case is unlikely to be replicated. Phonix's arrival was already listed on the offloading schedule at Rizhao Port before the U.S. announced its latest sanctions list, and the buyer was heard helping to expedite the process. Even so, the financial institution remained cautious about the sanctions, and it was unclear whether the payment transaction had been approved.

As China avoids directly dealing with tankers on the sanctions list, Iranian oil sellers must rely on those not yet flagged by the U.S. to ferry oil to Chinese ports. Kpler data shows that there are 56 tankers involved in shipping Iranian oil in 2024 that have not been added to the sanctions list, with a combined shipping capacity of 14.5 million DWT. Of these, 29 are currently operating on the Iran-China or EOPL-China routes, while the rest are either idle awaiting orders or deployed on other routes, such as EOPL-EOPL or Venezuela-China. In contrast, more than 35 tankers are shuttling oil between Iran and EOPL, with a combined capacity of approximately 37 million DWT. The mismatch in shipping capacity between the two parts of the journey has led to a buildup of floating storage at sea, as tankers loaded with oil from Iran must wait longer for available vessels to carry out the trip to China. The floating storage of Iranian oil appears to have been rising over the past three weeks, mostly concentrated in the EOPL region.

Iranian oil floating storage by current location, Mbbls

Source: Kpler

Tighter supply to China has triggered a sharp price hike, with Iranian Light trading at around -$2/bbl against ICE Brent on a DES basis, a level not seen in more than two years. Prices are expected to rise further, especially under the new Trump administration, is widely anticipated to impose tougher sanctions on Iran. A market participant told Kpler that sellers now demand a $0.3/bbl risk premium for transporting Iranian oil from sanctioned tankers. Amid concerns over tight Iranian supply, some Chinese refiners have sought alternatives in case their orders cannot be delivered on time. This coincides with China’s issuance of additional crude import quotas last month, as well as major trading houses like TotalEnergies snapping up cargoes from the Platts Dubai and North Sea windows, enabling refiners to secure spot cargoes to meet their urgent needs.

Selected crude diffs vs ICE Brent on DES China basis, $/bbl

Source: Argus Media

Yet, for most Chinese independent refiners, non-sanctioned oil is still considered too expensive, even with discounts offered by sellers, as their refining margins struggle to stay positive while predominantly relying on sanctioned feedstocks. The 70 kbd Landbridge Petrochemical purchased a VLCC of Angolan crude in November for December-January delivery but was later heard to have resold the cargo to Unipec. With the fall of the Assad regime, Iran's oil exports to Syria are likely to cease in the near term and be redirected to China, leaving Tehran almost entirely dependent on Chinese private refiners as its market outlet. The potential increase in supply to China, though only about 50 kbd, could give Chinese buyers more leverage at the negotiating table to settle on a price that accounts for shipping challenges while still allowing refiners to make a profit. To achieve this, Iranian oil sellers will first need to offer concessions to the middlemen.

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