China's Teapot Refiners May Increase Iran Oil Buying Amid Dwindling Stockpiles

China's leading independent refiners, particularly those located in Shandong province, may be poised to increase their purchases of Iranian crude oil due to dwindling domestic stockpiles. This potential surge in demand could signify a crucial economic revival for Iran, which has experienced a period of slow oil sales. The decline in inventory levels among independent refiners is a development closely watched in global energy markets.

This situation brings back into focus the role of China's independent refiners, often referred to as ‘teapot refiners,’ in the acquisition of Iranian crude. These refiners traditionally account for approximately 90 percent of Iran's oil sales. Previously, softening demand led to a significant accumulation of Iranian crude on tankers at sea. According to estimates from energy market consultancies, crude oil inventories held by independent refiners in Shandong decreased by an estimated 35 million barrels in July, marking the largest monthly draw since 2016. Concurrently, total regional stockpiles fell to 360 million barrels in July, reaching an eight-month low.

While China does not publish official oil inventory data, third-party analyses indicate that independent refiners operate on razor-thin margins and favor discounted Iranian and Russian crude. The Beijing administration had previously granted additional import quotas to refiners following a directive for increased fuel production, but this order was eased in June due to swelling domestic fuel inventories and mounting losses. Nevertheless, data from Mysteel OilChem shows that Shandong refiners have ramped up operations since early July, with utilization rates rising to 50.26 percent as of August 7. Emma Li, lead China analyst at Vortexa Ltd., anticipates that sanctioned crude will gain market share in China during August, with Iranian crude imports expected to rebound.

The market impact of this development could manifest as an increase in Iran's oil exports and a vital revenue stream for Tehran. Although China's overall crude oil inventories stood at a robust 1.208 billion barrels as of August 6, the utilization of these stockpiles has helped to alleviate demand pressure in global markets and prevented oil prices from surging higher. Last year, China aggressively built up its crude stockpiles to provide a buffer for refiners after the Iran war disrupted supplies from the Middle East. However, the drawdown by independent refiners is now creating a need for fresh purchases in the market.

China, as the world's largest oil importer, sources more than half of its oil needs from the Middle East, with over 80 percent of Iran's seaborne oil exports going to China in 2025. China's independent 'teapot' refiners play a strategic role in securing the country's energy supply by capitalizing on discounted oil from Iran, Russia, and Venezuela, made cheaper by international sanctions. However, the United States continues to impose sanctions on some Chinese refiners importing Iranian oil. This situation underscores China's efforts to maintain balance in its energy supply and navigate geopolitical risks.

Market analysts anticipate that the declining stockpiles at independent refiners in Shandong will lead to increased Iranian crude purchases in August. However, weak refining margins and high feedstock costs had previously led some refiners to opt for maintenance shutdowns rather than acquiring more cargoes. A potential agreement between Washington and Tehran allowing passage through the Strait of Hormuz and sanctions waivers could push Iranian crude prices higher. Nevertheless, market experts caution that if the Strait of Hormuz remains open and sanctions on Iranian oil are lifted, a global market oversupply could emerge, potentially leading to further declines in regular crude oil prices.