Russia and Iran Engage in Price War for Chinese Oil Market
Russian and Iranian oil producers are reportedly offering significantly deeper discounts to compete for the same limited pool of Chinese buyers. This aggressive pricing strategy comes after India substantially pulled back from purchasing oil from these nations, creating a supply glut that is now flooding Asian markets.
India's Import Reduction Sparks Supply Displacement
Analysts indicate that India's imports from Russia could fall by approximately 40 percent from January levels, potentially dropping to around 600,000 barrels per day. This scenario, projected by Rystad Energy and reported by Bloomberg, has forced much of the displaced crude to head eastward, directly sparking the current price competition with Iranian suppliers.
Chinese private refiners, historically known as teapots, have long favored Iranian crude. However, their capacity to absorb additional supply appears to be reaching its maximum limit. "The Chinese private refiners cannot take in much more as their capacity is likely maxed out," explained Jianan Sun, an analyst at Energy Aspects. He noted that sanctioned barrels are accumulating in both onshore and offshore storage facilities.
Deepening Discounts on Key Crude Grades
The price competition has resulted in substantial discounts for both major suppliers:
- Russian Urals crude is reportedly selling at approximately $12 per barrel below ICE Brent, representing an increase from the $10 discount observed last month.
- Iranian Light crude is trading for as much as $11 below the global benchmark, widening significantly from the $8–$9 discount range recorded in December, according to industry traders.
Capacity Constraints in China's Refining Sector
China's teapot refiners have traditionally functioned as a pressure valve within global oil markets, absorbing barrels that other buyers avoid due to sanctions or geopolitical concerns. However, their operational capacity is fundamentally limited. These independent refiners account for roughly one-quarter of China's total refining capacity and operate under strict government import quotas that restrict their purchasing volumes.
Meanwhile, major state-owned Chinese refiners have largely avoided both Iranian crude historically and have recently maintained distance from Russian barrels as well. This dual avoidance by the primary refining sectors leaves China unable to fully absorb the displaced supply, resulting in unsold oil accumulating in Asian waters.
Geopolitical Pressures and Storage Buildup
The situation leaves both Russia and Iran scrambling to manage their oil exports. The Kremlin has already implemented production cuts, which deprives it of crucial funds needed for its ongoing war in Ukraine. Concurrently, Iran is attempting to ship as much oil as possible amid growing fears of a potential military strike by the United States.
Recent data reveals contrasting trends in export volumes:
- Russian oil deliveries to Chinese ports increased to 2.09 million barrels per day during the first 18 days of February. This represents a roughly 20 percent increase from January levels and is nearly 50 percent higher than December figures.
- By contrast, Iranian exports to China have fallen approximately 12 percent from year-earlier levels, settling at roughly 1.2 million barrels per day, according to data from Kpler.
The firm estimates that nearly 48 million barrels of Iranian crude are currently at sea, a significant increase from about 33 million barrels in early February. Russian cargoes sitting in Asian waters total around 9.5 million barrels, indicating substantial floating storage.
Risk Assessment and Future Uncertainties
A potential US strike on Iran could severely disrupt exports if oil facilities are targeted or shipments through the critical Strait of Hormuz are blocked. This geopolitical risk creates additional uncertainty for market participants.
Russian barrels currently carry a "relatively lower level of risk" for Chinese buyers compared with Iranian crude, stated Lin Ye, vice president of oil markets at consultancy Rystad Energy. This assessment cites growing optimism over a potential ceasefire in the Ukraine conflict, which could stabilize Russian supply chains.
The combination of India's import reduction, China's capacity constraints, and geopolitical tensions has created a perfect storm in Asian oil markets. Both Russia and Iran face mounting pressure to secure buyers for their crude, leading to increasingly competitive pricing that may reshape regional energy trade patterns in the coming months.
