Iran revises its oil prices to compete with Russia for the Chinese market

Iran revises its oil prices to compete with Russia for the Chinese market
FILE PHOTO: Oil and gas tanks are seen at an oil warehouse at a port in Zhuhai, China October 22, 2018. REUTERS/Aly Song

After Western sanctions piled onto Russia’s economy because of the Ukraine invasion, the country slashed its oil prices, leading to increased buying interest from nations like China and India. In May, China’s imports from Russia surged 80% on year to US$10.27 billion. But aside from Russia, Iran also faces significant US sanctions.

So now, to compete for China’s interest, Iran is revising its oil price tags, pricing oil around US$10 below the price of Brent futures, which is on par with the prices of some of the Russian oil arriving in China next month. These lower prices are especially important because independent Chinese oil refineries (otherwise known as “teapots”) face stricter rules when it comes to exporting and are required to supply the domestic market first. So these independent refineries can’t sell fuel overseas where prices are higher because of the supply crunch, even if it means lower margins and losing money by taking care of domestic demand.

Key comments:

“The only competition between Iranian and Russian barrels may end up being in China, which would work entirely to Beijing’s advantage. This is also likely to make the Gulf producers uneasy, seeing their prized markets taken over by heavily discounted crude,” said Vandana Hari, founder of Vanda Insights in Singapore.

“Costs are a big concern mainly for the teapots. This is likely to remain the trend until the economy starts to pick up and activity resumes, at which point demand for all crudes will increase,” said Michal Meidan, director of China Energy Programme at the Oxford Institute for Energy Studies.