Discounts for Iranian oil in China have widened on record stock levels at a major refining hub and as a shortage of import quotas towards year-end hindered buying by independent processors, six trade sources told Reuters.
Slowing demand from Chinese independent refiners in Shandong province, known as teapots, adds to pressure on Iran to sustain its oil revenue amid Western sanctions aimed at curbing its uranium enrichment programme.
Those sanctions have reduced shipments into a key Chinese port, according to data analytics firm Kpler.
Washington most recently imposed sanctions on August 21 on Qingdao Port Haiye Dongjiakou Oil Products, controlled by local government-backed Qingdao Port International, for receiving Iranian oil on designated tankers.
The Haiye Dongjiakou terminal, the sixth in China to be blacklisted by the US, previously handled 130,000-200,000 barrels per day of Iranian crude, making it one of China's largest receiving terminals for such oil, two of the sources said.
That terminal suspended operations shortly after the US penalty, three people familiar with the terminal said. China has bought over 90 per cent of Iranian oil exports in the past few years, with January-August imports at an average of 1.43 million bpd, up 12 per cent annually, according to estimates by tanker tracker Vortexa.
To circumvent sanctions, dealers brand Iranian oil mostly as Malaysian, after trans-shipment near Malaysian waters.
China defends its oil trade with Iran as conforming with international law, and describes unilateral US sanctions as illegitimate.
Haiye Dongjiakou did not respond to calls and emailed requests for comment. Qingdao Port International did not respond to an emailed request for comment on the sanctions impact.
Crude imports at Dongjiakou port have declined 65 per cent this month, Kpler senior analyst Ying Cong Loh said, citing data as of September 15. A separate terminal at the port, Qingdao Shihua Crude Oil Terminal, has not been sanctioned.
Traders have been diverting Iranian shipments to nearby terminals if the vessels have not been sanctioned, three trade sources dealing with Iranian oil said. They declined to be named due to the sensitivity of the matter.
Iranian oil imports at Huangdao, another discharge hub in the broader Qingdao Port area, are expected to rise to 229,000 bpd in September, twice the 123,000 bpd in August, Kpler's predictive data showed last week.
Discounts for Iranian Light crude widened to over $6 a barrel versus benchmark ICE Brent this week for October-arrival shipments, five trade sources said, compared with around $5 a barrel two weeks ago and $3 in March.
Record crude stocks in Shandong depressed refining margins at smaller independents, while a shortage of government-issued import quotas hindered buying, the sources added.
Deeper discounts also reflect a price reduction by Iranian suppliers to account for sanctions-linked costs for customers, an Iranian trade source familiar with Tehran's oil marketing said in late August.
Shandong's onshore commercial crude oil inventories reached a record 293 million barrels as of August 22, 20 million barrels above levels at the start of July, much of it due to Iranian oil, according to tanker tracker Vortexa Analytics.
(Reporting by Chen Aizhu, Siyi Liu and Trixie Yap; Editing by Florence Tan and Bernadette Baum)
