The possible lifting of U.S. sanctions on Iran's oil exports could deal a fatal blow to independent Chinese refineries that have thrived by processing Tehran’s discounted crude, while also putting further downward pressure on oil prices.
President Donald Trump has taken a dual-track strategy with Iran, applying a "maximum pressure" campaign of tightening economic sanctions, while simultaneously engaging in direct high-level talks over Tehran’s nuclear program. Last week, Trump indicated the sides were getting very close to a deal.
Of course, nuclear talks between Iran and Western powers have always been extremely complex – full of stops and starts – and Trump’s recent statements surrounding a potential deal include much hedging.
But if there is a breakthrough deal, it would almost certainly include a repeal of many U.S. economic restrictions on Iran’s oil industry, which would have a profound impact on global energy markets.
Large volumes of sanctioned crude have made their way into China in recent years through a complex web of shell companies and a so-called "dark fleet" of tankers that transfer oil between different vessels to obscure the origin.
The precise total volumes involved in this trade are unclear as official Chinese customs data suggests the country does not import any Iranian oil. However, Kpler, using ship tracking and satellite technology, estimates that China imported 77% of Iran’s 1.6 million bpd of exports last year.
They tend to be more expensive than conventional fuel largely because they are not produced at scale.
So far this year, China’s share averaged around 50%, probably as a result of new U.S. sanctions targeting several Shandong teapot refineries and port operators, a theory supported by the fact that the amount of Iranian crude sitting on ships at sea, instead of being discharged, has reached the highest level since November 2023. If sanctions are loosened, this oil would be sold swiftly.
Iran's crude and condensate exports
Iranian oil floating storage
TEMPEST IN A TEAPOT
Iranian production could also likely be ramped up quickly.
Its oil sector has proven surprisingly resilient in the face of mounting Western sanctions, with crude oil production averaging 3.3 million bpd in 2024, according to OPEC data. Production could be ramped up by 500,000 bpd within six months of lifting sanctions.
Not only would the rapid return of Iranian crude to global markets likely put further downward pressure on oil prices that have fallen from a high of $82 a barrel in January to around $65 today, but it would also deal a heavy blow to China’s teapot refineries.
These independent outfits typically have very slim profit margins because most run at utilization rates of around 50% or less due to overcapacity in the sector and restrictions on exporting fuels overseas.
Plants have faced fierce competition in recent years, and those that have survived have done so largely because they have been able to generate lucrative profits by processing cheap Iranian as well as Venezuelan feedstock.
The removal of U.S. sanctions on Iranian crude could therefore undermine their business models, meaning many plants would likely have to sharply pare back operations or, in some cases, shut down entirely.
A drop in output from Chinese teapots, in turn, could provide a boost to large state-owned Chinese refineries that will pick up the slack in the domestic market. More broadly, a decline in global refining capacity should boost the sector at a time of increasing uncertainty over demand for fuels such as gasoline and diesel due to the ongoing trade war and energy transition.
The return of Iran into global oil markets would create headaches for many – not least Saudi Arabia, which is in the middle of a price war – but the biggest losers would likely be the independent Chinese refiners. And the biggest beneficiary, outside of Iran itself, would be the refining industry – whether or not that’s what Trump has in mind.
Iran's crude oil production