China could see its imports of cheap Iranian crude oil getting squeezed if Donald Trump ramps up enforcement of sanctions on Tehran after he secured his second presidency on Wednesday.
Iranian crude exports make up 13% of China’s total imports of the fuel.
Beijing is also the world’s largest importer of crude oil.
Analysts at Commerzbank AG believe that in his second term as US President Trump could maximise efforts to re-impose sanctions on Iran’s oil industry.
Under the Biden administration, the US was lenient on Iran’s oil exports.
This led to Iranian crude exports slumping to below 2 million barrels per day in 2020 from nearly 4 million barrels per day in 2018.
Exports have since then risen to more than 3 million barrels per day from Iran.
China’s refining costs may increase
With Trump in power, sanctions on Iran would prevent Tehran from supplying oil to other countries.
This would drive up the cost of China’s crude imports and put upward pressure on Beijing’s refining capacities.
Vivek Dhar, a commodities strategist at Commonwealth Bank of Australia, said in a note:
A Trump victory may see the United States enforce sanctions against Iran, thereby reducing Iranian oil exports and prompting oil prices higher.
Overall China’s demand for crude has been affected due to its struggling economy.
This has also weighed on global demand for oil as China is the second-largest economy in the world and the largest oil importer.
In 2018, during Trump’s first term at the White House, he reinstated sanctions on Iran, leading to a halt in its exports to countries such as India, Japan, and South Korea.
China and Iran have built a trading system that uses mostly Chinese yuan and a network of middlemen, avoiding the dollar and exposure to US regulators, making sanctions enforcement tough, according to Reuters.
Sanctions on Iran
According to Reuters, last month the US imposed sanctions on Iran’s so-called dark fleet ships, which carry oil.
This has slowed Iranian oil flows from Malaysia to China, Reuters said in a report.
Chinese independent refining sector plants, known as teapots, may have to cut runs if stricter sanctions are imposed by Trump on Iran.
According to data from Vortexa, China’s imports of Iranian oil rose 30% between January and October despite tighter sanctions, which have encouraged dark fleet shipping activity.
Vortexa analyst Emma Li was quoted in a report by Reuters:
We may only see significant changes when other players, such as banks, are added to the list.
Iranian crude oil is usually transferred by dealers to Malaysia, Oman, and elsewhere, and then supplied to importing countries such as China to avoid US sanctions.
Oil prices slide
Oil prices fell sharply on Wednesday as the dollar surged after Trump’s election victory.
A stronger dollar makes commodities priced in the greenback more expensive for overseas buyers, limiting demand.
Moreover, prospects of increasing production of oil from the US also weighed on prices.
Trump’s victory means he would allow more drilling of oil and gas on federal lands, which would raise production from the world’s largest producer of crude.
At the time of writing, the price of West Texas Intermediate crude oil was at $70.85 per barrel, down 1.6%.
Brent crude oil was down 1.7% at $74.26 per barrel.
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