US sanctions first Chinese teapot over Iranian oil trade

Market & Trading Calls

• Bearish Iranian oil prices as Shandong buyers become more risk-averse.
• Bullish Dubai backwardation as refiners will rush for similar-quality crude as a replacement.
• Bullish flat prices as market expectations of supply losses from Iran gain more ground.

On Thursday 20 March—coinciding with Nowruz, the Iranian New Year—the U.S. introduced its fourth round of sanctions on Iran’s oil trade since President Donald Trump vowed a return to a “maximum pressure” campaign in February to drive the country’s oil exports to zero. The U.S. Department of the Treasury identified eight vessels and imposed sanctions on 12 entities, including Shandong Shouguang Luqing Petrochemical, a 60 kbd private refinery in Weifang City. This marks the first time a Chinese teapot refinery has been exposed to U.S. sanctions over the Iranian oil trade, which will send shockwaves through the entire trading network—including refineries, trading intermediaries, financial institutions, ports, and shipowners.

China’s imports of Iranian crude surged by a whopping 60% from a low level in January to 1.43 Mbd in February, despite tighter U.S. sanctions. Weak refining margins have limited teapots' options in selecting feedstocks, especially after Beijing’s new tax rebate policy reduced the economic viability of buying fuel oil. Meanwhile, Iran has managed to attract new vessels to transport its barrels, partially mitigating the impact of Washington’s sanctions on its oil fleet. Earlier this week, Iranian Light crude was traded at a discount of around $1/bbl to ICE Brent on a DES basis in Shandong for April arrival—the highest level in more than three years—reflecting higher freight rates amid intensified risks. However, it remains roughly $4/bbl cheaper than similar-quality Middle Eastern crude.

DES Shandong differentials for Iran Light and other selected grades vs ICE Brent, $/bbl

Source: Argus Media

The immediate implication for Luqing is that the refinery will face difficulties in financing and payments. It remains to be seen whether the government will introduce a rescue plan as the plant employs some 3,000 staffs and reached revenue of about ¥75 bn last year. The refinery recently started a ¥10.8 bn project to build 44 crude oil storage tanks with a total capacity of about 41 Mbbls in Weifang City, which will transfer to a new contractor.

With heightened risks, Iranian crude prices are set to plunge as sellers scramble to attract buyers. However, other frequent buyers of Iranian crude, especially major players, are expected to halt liftings and reassess risks in the coming weeks, if not months. Meanwhile, financial institutions and ports are likely to tighten risk and compliance inspections, potentially declining transactions and refusing to receive Iranian cargoes—regardless of whether the carriers are under OFAC sanctions.

Kpler data showed that as of March 20, at least 11 Mbbls of Iranian crude were either sitting at Chinese ports and anchorages or set to arrive within the next three days. Iranian oil in floating storage remains at an elevated level of 19 Mbbls, mainly around Singapore and Malaysia. The latest round of OFAC sanctions is expected to extend waiting times for discharge—if not result in outright rejection by ports or buyers.

The latest sanctions are likely to trigger panic among some Shandong refiners, leading to reduced purchases of discounted Iranian crude despite its attractive pricing. This comes as OPEC+ moves to compensate its seven largest producers, offsetting much of the planned production increases from April onward. At the same time, the Trump administration is reportedly considering a two-month extension of Chevron's waiver in Venezuela—a move that, if approved, would prevent additional flows of Venezuelan crude to China and lend support to Dubai crude, the key medium sour benchmark in Asia.

Iran’s crude oil production, which has remained stable at around 3.3 Mbd in recent months, is expected to start declining in the months ahead. Exports were already set to fall in March and April due to Nowruz holiday-driven surges in domestic gasoline demand, which will exceed 150 million liters per day this year.

The latest U.S. sanctions do not alter our forecast for Iranian oil production, as we had already anticipated tighter enforcement from the Trump administration, leading to a 500 kbd decline in Iranian output and exports by summer—bringing oil exports down to around 1.2 Mbd. However, Washington retains the ability to escalate pressure further, potentially pushing Iran’s oil exports below 1 Mbd.

Iran crude oil production, kbd

Source: Kpler

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