Weak demand from Iran’s top crude buyer, China, has dragged Iranian flagship oil prices into discounts to ICE Brent for the first time in two months, trade sources told Reuters on Thursday.
Demand for Iranian oil in its biggest export market has waned in recent weeks, as imports in China slump to multi-month lows and the independent refiners, the so-called teapots that buy the bulk of Iran’s oil, reduce run rates.
This has dragged the price of Iranian Light crude to discounts ranging from $0.50 to $1 per barrel to ICE Brent for delivery in June into the province of Shandong, the home of the teapots, traders told Reuters.
To compare, Iranian Light cargoes were sold at premiums of $1–2 per barrel over ICE Brent in April and May.
The premium for Russian crude has also weakened as the sluggish Chinese demand has prompted sellers to cut prices. The premium for ESPO, the most popular Russian grade with China’s independent refiners, has dropped to $3–4 per barrel over ICE Brent for June delivery, from $4–5 a barrel in May, according to Reuters’ trade sources.
Despite the massive loss of supply from the Middle East, Chinese teapots are reducing intake of Iranian and Russian crude as prices remain too high for them and drag them into further losses.
Many of these teapots have been operating at near-normal rates since the Iran war began as the Chinese authorities ordered sufficient domestic fuel supply.
But in recent days, it appears that China has allowed some independent refiners to reduce processing rates amid mounting losses as Chinese crude and fuel stockpiles remain comfortably high despite the Middle East crisis.
The National Development and Reform Commission, the state planner, has issued notices to some loss-making independent refiners that they can reduce fuel output from June to no lower than 80% of last year’s monthly average, trade sources and consultancies told Reuters earlier this week.
As inventories are sufficient enough, also due to China’s slashed exports, the Chinese authorities now seem to be inclined to relax the policy, at least for some of the struggling private refiners.
By Tsvetana Paraskova for Oilprice.com
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