China Refiners Flock to Iraqi Crude as US Chokes Iran Supply

China’s independent refiners are turning to Iraqi crude after a US blockade choked supplies from top source Iran, while competition from state-owned rivals priced most of them out of Russian barrels.

Private processors, including smaller ‘teapot’ refiners in Shandong province, have bought Iraq’s Basrah Heavy and Basrah Medium grades for November delivery at premiums of as much as $18 a barrel to ICE Brent, according to traders familiar with the matter. The purchases point to a rush for prompt supplies rather than a strong recovery in Chinese oil demand .

At least 50 tankers, mostly carrying Iranian crude, are bottled up along the nation’s coast as a US blockade seeks to pressure Tehran into ending the seven-month war on terms favorable to Washington. At the same time, state-owned Chinese refiners are taking most of the available Russian crude, driving up costs for independent processors.

Inventories at some Shandong teapots could run out as early as the end of this month, forcing refiners to compete for a shrinking pool of alternatives just as Beijing issued fresh crude-import quotas, said Muyu Xu, senior crude analyst at Kpler. “To avoid shutting down or significantly cutting run rates, refiners need to secure alternative supplies as soon as possible.”

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The supply squeeze has pushed some processors toward sulfur-rich Basrah crude, which they typically avoid in favor of cheaper Iranian barrels and diesel-rich ESPO from Russia’s Far East.

Improving Middle Eastern flows , as Gulf producers move more oil through the Strait of Hormuz, are also making Iraqi crude increasingly accessible. Producers in the region are deepening discounts to defend market share after Saudi Aramco cut the price of its flagship grade for Asian buyers.

Meanwhile, Russian barrels remain expensive, with ESPO commanding a premium of almost $30 a barrel above Brent, the traders said, asking not to be identified as the negotiations are private.

“Teapots are very price sensitive,” Kpler’s Muyu Xu said, adding that Basrah is now cheaper than Russia’s ESPO, making those barrels increasingly attractive to private refiners.

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Buyers of Iraqi crude include both private processors in China’s Shandong province and some large independent refiners, according to the traders. Iraqi barrels are typically marketed by trading houses such as Vitol Group, Trafigura Group and Mercuria Energy Group, as well as TotalEnergies SE.

Iran was a major crude supplier to China’s independent refiners before the blockade, with imports exceeding 1 million barrels a day prior to the war. Private processors were the main buyers, attracted by steep discounts on sanctioned barrels that bolstered refining margins.