• Bloomberg

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China doubled down on imports of Iranian and Venezuelan crude in 2021, taking the most from the U.S.-sanctioned regimes in three years, as refiners brushed off the risk of penalties to scoop up cheap oil.

Crude processors in the world’s biggest importer were observed to have bought 324 million barrels from Iran and Venezuela in 2021, about 53% more than the year before, according to data from market intelligence firm Kpler. That’s the most since 2018, when China took 352 million barrels from the two nations.

Chinese buyers, particularly private refiners, have benefited from Washington’s tough line on Iran and Venezuela, continuing to buy their oil long after their counterparts elsewhere in Asia ceased purchases. The risk that non-U.S. entities may lose access to the U.S. financial system or have their American assets frozen if found guilty of breaching the sanctions hasn’t dissuaded them.

A glut of unsold cargoes, rising international prices, and the issuance of more crude import quotas by Beijing, have incentivized the private refiners, known as teapots, to snap up more oil from the pariah states. These shipments typically don’t show up in official customs data.

“This surge was triggered by rising crude prices, making Iranian crude, anecdotally, up to 10% cheaper when delivered into China,” said Anoop Singh, head of East of Suez tanker research at Braemar ACM Shipbroking Pte Ltd. The U.S. also eased up on sanctions enforcement as it tried to get a nuclear agreement with Iran, he said.

Going dark

Sanctioned oil is typically transported on old ships that would have otherwise been set for the scrapyards, providing cost savings, according to Singh. Cargoes may be shipped directly from the country of origin on tankers that have gone dark — meaning their transponders are turned off — or transferred between vessels at sea to mask where the crude has come from, he said.

Iranian and Venezuelan crudes are often rebranded and passed off as oil from Oman and Malaysia. China hasn’t received any Iranian crude since December 2020, while imports from Oman and Malaysia have risen, official data show.

Chinese imports of sanctioned crude should stay elevated around current levels early this year amid slow progress on the nuclear talks, said Singh.

International oil prices that have jumped almost 50% over the past year are also making cheaper, sanctioned barrels more attractive. This could be exacerbated by tax and pollution investigations into Chinese teapots, which are putting more pressure on them, said Yuntao Liu, an analyst with Energy Aspects in London.

The price of sanctioned oil will always be discounted, said Emma Li, a Singapore-based analyst at Vortexa Ltd. “For teapots, the incentive is always the low price, compared with other popular grades.”

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