ISTANBUL

Tensions in the Middle East have pushed oil prices higher and cast new uncertainty over Iranian crude flows, a development that experts say could ripple through China’s refining sector just as another key source of discounted oil, Venezuela, becomes increasingly constrained.

China is the world’s largest crude oil importer, bringing in roughly 11.6 million barrels per day (bpd) in 2025, according to the Center on Global Energy Policy (CGEP) at Columbia University. Analysts estimate that around 2.6 million bdp of these imports consist of discounted or sanctioned crude, including approximately 1.38 million bpd from Iran, making Tehran one of China’s most significant external suppliers.

These discounted barrels have become particularly important for independent refiners, often referred to as “teapot” refineries, which operate largely in the eastern province of Shandong. Unlike large state-owned companies, these installations typically rely on lower-cost crude supplies to remain competitive in domestic fuel markets.

But the supply cushion is now under pressure from two directions. Iran’s exports face growing risks as its war with Israel and the US escalates, while shipments from Venezuela – another key source of heavy discounted crude for Chinese refiners – have already begun to shrink after Washington captured President Nicolas Maduro and diverted Venezuelan oil toward American markets.

Iranian crude flows provide critical supply

Despite the potential risks, as Iran faces large-scale US-Israel attacks, including strikes on oil depots, analysts say China’s supply chain currently includes buffers that could mitigate the immediate impact of any disruption.

Matt Smith, lead oil analyst at energy analytics firm Kpler, said a significant volume of Iranian crude is already positioned near China in storage or transit. “About 50 million barrels of Iranian crude are currently sitting offshore China and Malaysia, providing a supply cushion to any disruption,” Smith told Anadolu.

He added that Iran increased shipments ahead of the recent escalation in the Middle East, meaning additional cargoes are already en route to Chinese buyers.

These barrels could help Chinese refiners manage short-term supply disruptions if exports from Iran were temporarily interrupted.

Smith, however, added that refiners have already begun adjusting their crude sourcing strategies amid shifting market conditions.

“China has increasingly been pulling in more Russian crude in recent months, given growing discounts as India has dialed back purchases,” he said.

According to him, Russia has become the leading supplier for Shandong since late last year, overtaking Iran as refiners search for alternative discounted barrels.

Middle Eastern supply routes remain key

While disruptions to Iranian exports would affect certain refiners, analysts say the larger concern lies in the stability of Middle Eastern supply routes, including the Strait of Hormuz, which is effectively closed to oil shipping due to the war.

Smith said that nearly half of China’s seaborne crude imports originate from the Middle East, making the region a critical pillar of its energy security.

“Supply disruptions in the Strait of Hormuz are a much, much bigger issue than the loss of Venezuelan crude,” he said.

The strait carries about 20% of the world’s oil shipments and is considered one of the most important energy chokepoints. Any sustained disruption could affect not only Iranian exports but also shipments from other major Gulf producers that supply Asian markets.

Independent refineries most exposed

The most immediate effects of any Iranian supply disruption would likely be felt by independent refineries clustered in eastern China.

Tom Reed, China crude analyst at Argus Media, said these facilities depend heavily on Iranian oil as a core part of their feedstock mix.

“Shandong independent refineries process around 2.5 million bpd of crude, so Iranian supplies are absolutely central to their operations,” Reed told Anadolu. “It would be extremely difficult for the teapots to replace the 1.3 million bpd of Iranian crude they currently receive.”

These refiners have historically relied on discounted crude from sanctioned producers to remain profitable in a competitive domestic market. In recent years, Iranian supplies have become one of the most important components of that strategy.

Limited alternatives for refiners

If Iranian flows were interrupted, Reed said independent refiners would face difficult choices in securing replacement supplies.

“They would either have to cut runs drastically or compete in the global market for replacement grades,” he said.

Before 2022, Shandong refiners were among the largest buyers of Brazilian crude, which could once again become an alternative source if Iranian shipments were disrupted.

However, Reed said, switching to those supplies would come with a significant cost increase.

“That would mean accepting costs of around $15 per barrel higher than what they currently face,” he said.

Such a price increase could quickly erode refining margins, particularly for smaller facilities that already operate on relatively thin profit margins.

Potential refinery run cuts

Reed said the loss of discounted Iranian and Venezuelan crude could force refiners to adjust their operating rates.

“Both refinery run cuts and potential shutdowns are likely if discounted Iranian and Venezuelan crude becomes unavailable,” he said.

Lower refinery runs could then tighten fuel supply in domestic markets and push prices higher. “This would force up prices for gasoline and diesel in China,” Reed added.

But structural changes in China’s transport sector may limit the long-term impact of higher fuel prices.

Demand for gasoline and diesel has already been gradually declining as electric vehicles and alternative fuel technologies expand across the world's second-largest economy.

“Demand for both fuels is currently being destroyed at the rate of about 200,000 bpd each year due to increasing use of electric vehicles and electric or gas-fueled trucking,” Reed said.

Petrochemicals likely less affected

Despite potential pressure on fuel markets, analysts say China’s petrochemical sector is less exposed to disruptions affecting independent refineries.

According to Reed, much of China’s petrochemical feedstock is supplied through large state-owned companies rather than independent refiners.

While Shandong refiners produce some petrochemical products such as ethylene and aromatics, the majority of China’s output comes from major state-owned firms or specialized cracking facilities that process imported naphtha.

As a result, disruptions affecting discounted crude supplies would likely have a greater impact on transport fuels than on petrochemical production.

Despite the potential risks associated with Iranian supply disruptions, analysts note that China maintains a relatively diversified crude import portfolio compared with many other Asian economies.

“China is the largest single market for Brazilian crude, West African crude and Canadian crude, giving it more supply options than other countries in the region,” Reed said.