- Reduced Chinese purchases and US sanctions pressure Iran.
Weak refining margins in China are forcing Iran to offer steeper discounts on its crude, as sluggish fuel demand and rising input costs squeeze the country’s independent refiners and drag down purchase volumes.
The pressure is not just a domestic Chinese story. It is rippling outward, reshaping how two of the world’s major oil exporters price their barrels and raising questions about where global crude flows go from here.
Bloomberg reported that Iran has cut the price of its Light crude grade for July delivery to a discount of more than one dollar a barrel below the ICE Brent benchmark, according to traders active in the market. That is a sharp reversal from last month, when Iranian crude was selling at a premium.
Russia’s ESPO grade, shipped from its far east, has also been marked down. ESPO now trades at a premium of three dollars a barrel to ICE Brent, down from six dollars a month ago, the traders said, asking not to be named because the information is not public.
The Teapot Problem
China’s independent refiners, commonly called teapots, are central to this story. They account for roughly 90 per cent of Iran’s oil sales and are among the largest buyers of Russian crude. But these processors are under serious financial strain.
Rising crude oil prices, driven partly by the ongoing West Asia crisis, have pushed up input costs. At the same time, demand for petrol and diesel inside China has weakened due to a broader economic slowdown and rapid adoption of electric vehicles. Fuel prices have not risen enough to cover the cost of expensive crude, leaving teapot refiners with shrinking and often negative margins.
To cope, many teapots have cut operating rates and pulled back on purchases. Iranian crude flows to China dropped to 1.1 million barrels a day in May, the lowest since January 2025, according to data from Kpler, reported by Bloomberg.
Over 50 million barrels of Iranian crude are currently sitting idle on vessels around the world, with more than 60 per cent of those ships anchored in the Singapore Strait and off the coast of China.
Beijing’s Reversal
The Chinese government had earlier directed its refining sector to keep producing fuels regardless of margins, partly to maintain supply buffers against Middle East disruptions. But as losses mounted, that directive is now set to be eased. The pullback in state support is likely to weaken crude buying further in the near term.
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Sanctions Add Pressure on Iran
Washington has also been tightening the screws. The United States has escalated sanctions on Iranian oil trade as part of efforts to push Tehran toward a negotiated settlement. Hengli Petrochemical (Dalian) Refinery Co., one of China’s largest independent refiners, was the most recently sanctioned entity in this campaign.
India Steps In, But Sea Routes Dominate
As China’s appetite weakens, Russia has found a more willing buyer elsewhere. Russia’s share in the value of India’s oil imports rose again in April 2026, continuing a trend of deepening energy ties between the two countries.
For Iran, alternative routes to China have been discussed. Overland rail and pipeline connections have gained attention as maritime disruptions persist. But experts believe that these routes do not have the capacity to replace large-scale sea-based shipments. Most Iranian oil still reaches China by sea, typically through the Strait of Hormuz and via transhipment networks. The proposed land links remain a strategic contingency rather than a working substitute.
The discounts being offered by both Iran and Russia are, for now, a measure of how much leverage has shifted toward buyers, even as those buyers struggle to stay profitable.
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