Chinese refiners switch to Iraqi crude amid Iranian supply drop

Chinese independent oil refiners are rapidly shifting their focus from Iranian crude to Iraqi supplies as US naval blockades disrupt traditional flows. Smaller "teapot" refiners in Shandong province have purchased significant volumes of Iraq’s Basrah Medium and Basrah Heavy crude for November delivery, paying premiums of up to $18 per barrel over ICE Brent. This shift follows a sharp decline in Iranian oil imports, which dropped to around 590,000 barrels per day in September, the lowest since January 2023. Traders reported buying at least 12 million barrels of Iraqi and Qatari crude, with estimates suggesting total purchases could reach 15 to 20 million barrels.

The reduction in Iranian supplies has created a critical shortage for independent refiners, who previously relied on heavily discounted sanctioned crude. Floating storage of Iranian oil has fallen to 45 million barrels from around 100 million barrels in late July. The disruption has also made Russian crude less appealing, as state-owned Chinese companies have secured most available supplies, pushing prices higher. Russian ESPO crude is now trading at nearly $30 per barrel over Brent, making Iraqi crude a more cost-effective alternative.

Without quick access to replacement crude, some Shandong refiners could face depleted inventories by the end of October. Kpler analyst Muyu Xu warned that refiners must secure alternative supplies to avoid shutdowns or substantial reductions in operations. Utilization rates in Shandong dropped to about 55% at the end of September, down from nearly 60% earlier in the month. Refiners are also recording losses of 250 to 500 yuan per metric ton due to the supply squeeze.

The shift to Iraqi crude is seen as a temporary solution, as refiners traditionally prefer cheaper Iranian and Russian supplies. The higher-sulfur content of Basrah grades is a less ideal alternative, but the current supply constraints leave them with few options. The situation highlights the challenges facing China’s independent refiners as they navigate geopolitical tensions and market disruptions.