Despite top Chinese refineries having reportedly suspended orders for Iranian crude oil, Chinese oil giants are unlikely to face stringent US sanctions even if they continue to import oil from the Middle Eastern country after the November 4 deadline set by the United States, since the move would significantly affect the global market, experts told Sputnik.
MOSCOW (Pakistan Point News / Sputnik - 26th October, 2018) Despite top Chinese refineries having reportedly suspended orders for Iranian crude oil, Chinese oil giants are unlikely to face stringent US sanctions even if they continue to import oil from the middle Eastern country after the November 4 deadline set by the United States, since the move would significantly affect the global market, experts told Sputnik.
Sinopec Group and China National Petroleum Corp (CNPC), the country's top two state-owned refineries, have both suspended placing new orders for crude oil from Iran, according to media reports, citing anonymous industry sources.
After US President Donald Trump announced his decision in May to withdraw from the Joint Comprehensive Plan of Action, also known as the Iran nuclear deal, the Trump administration said it planned to reimpose sanctions on oil exports from Iran on November 4.
If the Chinese refineries continue to buy Iranian oil after the new sanctions take effect, they could risk facing punishment from the United States, including being cut off from the global financial system dominated by US Dollars.
However, the growing weight and strength of Chinese refineries in the global crude oil trade makes it unlikely for the United States to impose harsh punitive measures against them, Chinese oil industry analysts argued.
"Even if Sinopec or CNPC continue to buy Iranian oil [after new sanctions take effect], the responsive sanctions against them from the United States would not be as harsh as cutting off their access to the global financial systems dominated by US dollars. That's because such a scenario would severely affect energy purchases of those companies in the global markets and could even threaten China's energy supply. This will be a much bigger problem than sanctions against Iran. I do not think the United States is willing to face such risks. That's why I believe the US responsive-sanctions would not hurt the Chinese refineries' oil trade in the global markets," Gao Jian, an oil market analyst at Shandong-based industry researcher SCI99, told Sputnik.
The analyst suggested that the United States could target and punish specific Chinese banks that handle payment for crude oil to Iran, without restricting the Chinese refineries' access to the global financial system or US dollars.
Rapid domestic economic growth has driven China's demand for crude oil to new heights in recent years. China overtook the United States as the world's largest crude oil importer last year, by importing an average of 8.4 million barrels per day (BPD) compared to US imports of 9.4 million BPD, according to the statistics from the US Energy Information Agency.
Due to limited domestic oil reserves, China's reliance on crude oil imports continued to grow as a result. According to a report from the Economics and Technology Research Institute under CNPC, China's crude oil imports accounted for about 67.4 percent of the domestic consumption for 2017.
After years of efforts to diversify the nation's energy supply, Iran became an important oil supplier for China. Crude oil imports from Iran accounted for 7.42 percent of China's total oil imports in 2017, making it the fifth largest crude oil supplier after Russia, Saudi Arabia, Angola and Iraq.
As US crude oil production and exports began to boom thanks to technological advancements in shale oil extraction, industry analysts suspected that Trump's sanctions on Iran were part of his efforts to boost the global market share of US crude oil.
However, even if China is forced to cut back crude oil imports from Iran, it is unlikely for US crude oil to fill in the void, Gao suggested.
"There is an issue with US crude oil trying to replace Iranian oil. That is because the quality of crude oil from these two countries is very different. For Chinese refineries, the crude oil they import from Iran is heavier, which requires different processing equipment compared to the lighter crude oil from the United States. That is why it is impossible for US crude oil to completely replace Iranian oil," he said.
The analyst added that China would probably need to try to buy more crude oil with similar quality from countries in the Middle East, such as Saudi Arabia or Iraq.
Global oil prices have stayed at high levels in recent months, amid concerns of Iranian crude oil exports being squeezed out of the global market under new US sanctions. After reaching a four-year high of $86.29 per barrel earlier this month, the benchmark Brent crude hovered around $80 in recent weeks.
If China needs to look for alternative sources of oil to make up for a possible reduction in Iranian oil imports, it may face the challenge from major oil producers such as Saudi Arabia, who may not be willing to increase oil output to a level that could drive the prices down, Zhang Weiwei, an oil market analyst at Xuzhou-based New Era Futures, said.
"If China faces oil supply difficulties [because of reduced imports from Iran], other countries in the Middle East are capable of filling in the void. It all depends on responses from countries like Saudi Arabia, which has been sending different signals recently. After pledging to raise output by 1-2 million barrels per day, it said the output capacity may become excessive in the fourth quarter. Saudi Arabia is in an awkward position, as it does not want the oil prices to fall, while facing pressure to increase output from Trump," Zhang told Sputnik.
The analyst expected global oil prices to stay at relatively high levels in the near future, as the transportation bottleneck in domestic infrastructure makes it unlikely for the United States to be capable of replacing Iran in the global oil markets.
