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Constricting Asian Market for Iranian Crude

by THOMAS STROUSE in Washington, D.C.

24 Sep 2010 23:26No Comments

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Chinese oil imports down nearly one-fourth; Japan drops 14 percent.

[ analysis ] A number of analysts argue that China's dependence on Iranian crude oil is inhibiting Beijing's willingness to implement U.N. sanctions against Tehran for its defiance on the nuclear issue. While there may be some level of truth to this claim, there have been several indications over the past year which suggest that China is increasingly turning away from Iran as a crude oil supplier -- and that it is not alone.

According to Chinese customs data released earlier this week, Iran was the third largest oil supplier to China in August. Regardless of monthly fluctuations, Iran has held this position consistently since 2005. The two largest suppliers to China during the past five years have been Saudi Arabia and Angola.

China has significantly reduced its oil purchases from Iran during 2010, both in terms of total volume and market share. According to the Chinese General Administration of Customs, from January through August, Chinese oil imports from Iran have totaled slightly above 13 million tons, a decrease of 24.7 percent compared to the same period last year. This roughly equates to 391,000 barrels per day (b/d), accounting for Iranian crude oil density. August imports from Iran were above the yearly average at around 458,000 b/d.

Among China's top 14 suppliers in 2010, Iran is the only one with reduced oil sales compared to the first eight months of 2009. Iran has lost market share due to increased Chinese imports from Saudi Arabia and Angola, as well as non-OPEC members Russia, Oman, and Sudan. Angola's oil sales to China have increased by 48.5 percent and Saudi Arabia's have increased by 12.5 percent compared to the first eight months of 2009. Angola and Saudi Arabia have each accounted for 18 percent of China's oil imports in 2010, while Iran has accounted for around 8 percent. In previous years, the respective market shares of China's top three suppliers have tended to be much closer to equal.

Whereas China currently imports around 8 percent of its oil from Iran, more than 15 percent of Iran's oil exports flow to China. As China continues to grow and tries to diversify its supply, Beijing does not want to increase its dependence on Iranian oil imports. This is largely because Iran is unable to satisfy China's rapidly rising demand for energy. While Chinese oil imports from Iran have decreased nearly 25 percent, its total oil imports have increased by around 23 percent compared to the first eight months of 2009. Iran's ability to increase its own production is not expected to grow as much as China's demand for oil, meaning that China should become less dependent on Iran as a crude oil supplier in the future. It would also be logical to assume that the Chinese have made a clear-headed geopolitical assessment that Iran may not be its most secure and stable source of supply.

There are occasionally wide monthly fluctuations in the sources of Chinese oil imports. For example, imports from Iran fell as low as 194,000 b/d in May of this year, making it the eighth largest source of imports that month. Some speculated that this had something to do with the threat of sanctions on Iran's oil and gas industry. The U.N. passed its fourth round of sanctions against Iran on June 9 and China released its customs data for May only a few days later. Iranian imports in May proved to be something of a seasonal blip, yet still indicative of China's pattern of reduced imports from Iran in 2010.

China's reduced imports of Iranian oil should not be viewed as a direct consequence of U.S. sanctions and Western political pressure. Japan, the other leading importer of Iranian crude oil, imported an average of 376,000 b/d from Iran during the first seven months of 2010, according to the International Oil Daily. This is a decrease of around 14 percent compared to the same period last year. It is likely that China and Japan's reduced imports from Iran have more to do with Iran's uncompetitive pricing than with political pressure from the West.

Two state-run companies are the only Chinese lifters of Iranian crude -- Unipec, the trading arm of Sinopec, China's largest refiner; and Zhuhai Zhenrong, the trading arm of Norinco, one of China's largest arms manufacturers. Zhenrong was set up in 1994 specifically to import oil from Iran and is currently the largest single lifter of Iranian crude oil. In its early commercial existence as a "rogue" trader, Zhenrong handled the purchase of crude oil at a time when China's import policy aimed to secure oil supplies in exchange for the sale of military armaments.

Unipec and Zhenrong are two of the Chinese companies that began selling gasoline to Iran earlier this year, stepping in to fill the void left by suppliers that halted gasoline imports to Iran under the threat of U.S. sanctions. Although Iran has drastically reduced its gasoline imports over the past two months, it is expected that the companies will be waiting to fill any market gaps that may arise in the future. At the same time, China will continue to view the security of its crude oil supply as critical to its strategic interests, taking advantage of the opportunities in the Iranian market, but also maintaining a watchful eye on how its own political and economic interests align with some of the world's major oil suppliers in the short and long term.

Thomas Strouse is a Middle East Analyst at Foreign Reports, a Washington D.C.-based oil consulting firm which reports on political developments in the Middle East relevant to oil markets.

Copyright © 2010 Tehran Bureau

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