China Turns to Russian and Iranian Oil as Middle East Conflict Threatens Supplies, but...

Chinese refiners are increasing purchases of Russian crude and reopening negotiations for Iranian oil as renewed conflict in the Middle East disrupts exports from one of the world's most important energy-producing regions.

The latest buying spree comes after renewed attacks linked to the Iran conflict disrupted shipping through the Strait of Hormuz, while Yemen's Iran-aligned Houthi movement threatened to target Saudi oil exports transiting the Red Sea. The twin disruptions have heightened concerns over the reliability of Middle Eastern crude supplies, forcing Asian refiners to reassess procurement strategies even as global oil prices climb.

Trade sources cited by Reuters said two major Chinese refiners recently purchased most of the September-loading ESPO Blend crude available from Russia's Pacific export terminal at Kozmino, highlighting a sharp increase in demand for Russian barrels.

Those cargoes reportedly traded at discounts of between $1 and $3 per barrel to ICE Brent, compared with discounts of around $4 per barrel for August-loading cargoes. The narrower discounts reflect stronger demand rather than improved supply, illustrating how Russian crude has become increasingly valuable as buyers seek secure alternatives to Middle Eastern oil.

India, China's main competitor for discounted Russian oil, has also stepped up purchases. An executive at Bharat Petroleum Corp (BPCL) said the state-owned refiner increased Russian crude processing during the June quarter, adding that traders are no longer offering meaningful discounts on Russian cargoes.

"Given the uncertainty in the Middle East, ESPO is a safer bet, and it is also cheaper," one trader at a Chinese refiner said.

Russia remains China's largest crude supplier, with ESPO Blend particularly attractive because of its relatively short shipping distance to Asia and lower freight costs compared with cargoes originating in the Persian Gulf.

However, Russian crude may not remain as readily available as many refiners hope.

While Russia continues to export substantial volumes, its ability to consistently increase shipments to Asian buyers is becoming less certain. Ukrainian drone attacks on Russian energy infrastructure have repeatedly damaged refining facilities, forcing Moscow to periodically adjust its domestic fuel balance and export strategy.

The result is a market where Russian oil still offers greater supply security than Middle Eastern barrels, but no longer provides the combination of abundant availability and deep discounts that characterized the early years of Western sanctions.

Against that backdrop, Chinese independent refiners, known as teapots, have resumed talks with Iranian suppliers.

According to traders, Iranian Pars crude is being offered at discounts of around $8 per barrel to ICE Brent for delivery into Shandong province, wider than earlier offers of approximately $6 per barrel. Iran Light crude is also available at discounts of $3 to $4 per barrel, slightly deeper than previous offers.

The widening discounts suggest Tehran is attempting to preserve export volumes as military tensions increase shipping risks and complicate the movement of sanctioned crude.

Even so, Chinese refiners are approaching purchases cautiously.

Although Iranian oil remains competitively priced, the surge in benchmark crude prices has squeezed refining margins. Brent has climbed toward the $100-per-barrel mark as traders factor in the possibility of prolonged disruptions through the Strait of Hormuz, a waterway that normally handles about one-fifth of global oil consumption.

Higher feedstock costs have eroded profitability for China's independent refiners, many of which are already contending with weak domestic fuel demand, overcapacity and narrower refining margins.

Earlier, during a brief easing of tensions between the United States and Iran, Chinese teapot refiners took advantage of abundant Middle Eastern supply by purchasing roughly 20 million barrels of non-sanctioned crude for July and August loading.

Some of those buyers are now attempting to capitalize on higher oil prices by reselling cargoes. Traders said the barrels have been marketed to buyers in Taiwan and South Korea at premiums of between $6 and $9 per barrel above the Dubai benchmark on a delivered basis, although it remains unclear whether any transactions have been completed.

China is widening its energy supply net as geopolitical events rapidly alter global oil flows. Rather than relying on a single alternative supplier, Chinese refiners are diversifying purchases across Russia, Iran and available Middle Eastern producers to reduce supply risk.