China’s Teapots May Boost Iran Oil Buying as Stockpiles Dwindle

my8{5{kjdos9slvgxybqhrmk_media_dl_1.png Kayrros, Energy Aspects

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(Bloomberg) — Shrinking regional oil stockpiles held by China’s independent refiners in Shandong province may spur increased buying of Iranian crude, offering Tehran a needed boost after a period of slow sales.

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Inventories in Shandong — home to most of China’s so-called teapot refiners — dropped to 360 million barrels in July, the lowest level in eight months, according to data compiled by Energy Aspects. Stockpiles in the region are held by both private as well as state-run processors.

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China’s teapots dialed back purchases and relied heavily on stockpiles after Beijing instructed them to maximize fuel production to help cushion the impact of the Iran war. The refiners are by far the biggest buyers of Iranian crude, typically accounting for about 90% of sales, and softening demand led to a swelling hoard of the country’s oil on tankers at sea.

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Energy Aspects estimates stockpiles in Shandong declined by 35 million barrels last month, the biggest monthly draw since the consultant started compiling the figures in 2016. Across China, meanwhile, the nation’s inventories still stands at a robust level of 1.208 billion barrels as of August 6, according to Kpler estimates which includes underground strategic reserves sites. 

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China doesn’t publish inventory data and estimates from third-party providers can often vary.

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China’s teapots, which operate on razor-thin margins, favor discounted barrels from Iran and Russia. Unlike state refiners, they require government-issued import quotas, and Beijing granted additional allowances after ordering higher fuel production. The directive was eased in June as domestic fuel inventories swelled and processors grappled with mounting losses.

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“We expect sanctioned crude to gain market share in China during August with Iranian crude imports expected to rebound,” said Emma Li, lead China analyst at Vortexa Ltd. The consultant estimates crude inventories held by teapots in Shandong fell by about 20 million barrels in July.

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China aggressively built up its crude stockpiles last year, providing a buffer for refiners after the Iran war disrupted supplies from the Middle East. Tapping that inventory also took some demand pressure off the global market, and is one of the reasons why oil prices haven’t surged much higher.

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Shandong refiners have ramped up operations since early July, with utilization rising to 50.26% as of Aug. 7, according to data compiled by Mysteel OilChem. The end of maintenance has boosted run rates, although they remain below seasonal norms. Margins have improved to their strongest since March after being mostly negative since late April, according to JLC.

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There are close to 30 million barrels of Iranian crude currently on tankers in Asian waters, according to Kpler, which could help replenish teapot stockpiles. Iranian Light for delivery in September was offered at discounts of about $4 a barrel to ICE Brent earlier this month, narrowing from about $5, according to traders. Russian ESPO crude was recently offered at a discount of around $1 below Brent to parity with the benchmark.