China's Oil Supply Chain Suffers Devastating Blow from US Navy Strike

The US Navy's attack on Iranian oil tankers has dealt a significant blow to China's oil supply chain. According to an article in Modern Diplomacy, the strike that sank an Iranian tanker loading at Kharg Island is expected to drastically hit Chinese oil supplies.

Kharg Island is the terminal from where 90% of Iran's oil exports are loaded, and most of this cheap crude is bought by China's smaller independent coastal refineries, known as 'teapot' refineries. These teapots account for 25% of China's production of petroleum products.

The US Navy strike goes far beyond financial sanctions, which China had managed to circumvent until now. Unlike state oil majors, which avoid sanctioned crude to protect their access to Western banks and capital markets, teapots built their business model on buying Iranian, Russian, and Venezuelan oil at steep discounts that state refiners won't touch.

The sinking of the tankers is expected to hit China's oil supplies sooner rather than later, as these teapot refineries are already low on stocks due to the choking of the Strait of Hormuz. They run on very thin margins that depend almost entirely on the sanctioned-crude discount to compete with better-capitalised state refiners.