China’s Record Oil Stockpile Offers Buffer as Iran Crisis Builds

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(Bloomberg) — Oil refiners in China — the largest takers of Iranian crude — are unfazed for now about the possibility of interruptions to Middle Eastern supplies given the nation has a record stockpile that provides a temporary buffer.

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At present, China’s total onshore inventory stands at a record 1.18 billion barrels, according to Kayrros, which monitors stockpiling. That includes holdings in the private oil-refining region of Shandong, which reached a peak of 355 million barrels, with part of that build due to a new storage tank and refinery opening, according to Antoine Halff, co-founder and chief analyst.

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The nationwide inventories, as well as soft refining margins and seasonal weakness in demand, are bolstering the refiners’ room for maneuver, at least for the time being. Processing rates at independent refiners, known as teapots, are about 45%, near a three-month low, according to Mysteel OilChem.

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“With a high stock buffer, teapots will not be in a rush to find alternative sources to Iranian crude, if the supply is disrupted,” said Jianan Sun, an analyst at Energy Aspects Ltd. “Ultimately, if Chinese teapots permanently lose Iranian crude, we don’t think they will replace all Iranian barrels with benchmark-linked grades, as some of them will be forced to cut runs.”

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The global oil market has been rocked over the past week after Israel attacked Iran to try to and roll back its nuclear program, with the US now weighing a decision whether to join the assault. The hostilities have raised acute concern that crude infrastructure, tankers, or chokepoints may be targeted, potentially snarling flows from Iran or other major Persian Gulf producers.

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China’s refiners potentially have a great deal at stake, with Beijing warning that the Iran-Israel conflict may trigger wider instability across the Middle East and Foreign Minister Wang Yi reaching out to the two countries. Asia’s largest economy is both the world’s biggest crude importer, as well as being the top destination for Iranian oil, which is sanctioned by the US.

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The crude volumes being held are higher than typical seasonal levels, according to OilX, part of Energy Aspects. Inventory levels at terminals in Shandong this month are about 10% higher than the same period last year, it estimates.

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Discounts on spot trades of Iranian Light crude for July arrival were little changed at $2 to $3 a barrel, compared with the Brent benchmark, according to traders, who asked not to be identified given the sensitivity of the information. Refiners were also not yet in the market for alternatives, such as Russia’s ESPO, which loads from the country’s Far East, they added.

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Still, there have been offers for Iranian Light at deeper discounts, although no deals have been done, the traders said. In addition, consultant FGE flagged in a June 18 note that there had been anecdotal accounts of some offers for Iranian crude being rescinded.

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“Teapots have bought less Iranian crude recently due to secondary sanctions, and have built up stocks locally, so can weather a short-term outage or disruption,” said Michal Meidan, director of the China Energy Research program at the Oxford Institute for Energy Studies. 

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