President Trump’s return to the Oval Office saw US authorities sanction Iranian traders, middlemen and infrastructure with fervent intensity, triggering a string of new legislative measures targeting Tehran’s oil revenues. The clampdown intensified amidst the Israel-Iran crisis, with the White House extending its sanctioning spree first on Chinese refiners (mostly smaller ‘teapots’ in Shandong province) and then also on China’s port operators and midstream companies allegedly dealing with Iranian oil. With more than 400 tankers blacklisted, some 50 Iranian or Iran-linked individuals and 20 companies directly targeted, it would be an understatement to say that Trump has ratcheted up pressure on Iran to unprecedented heights. Yet, more is to come.

Trump’s direct sanctions on Chinese refiners might be finally disrupting Iranian flows to China. According to Kpler data, Iranian crude held in floating storage surged from 9 million barrels in mid-January to 33.4 million barrels in early August, marking the highest level since 2020. The overwhelming majority of these stranded tankers are leisurely floating in the territorial waters of Singapore and Malaysia, primary hubs of Iranian ship-to-ship (STS) activity over the past years. Whilst Iran could easily carry out direct deliveries to China, without any stopovers in the Malacca Strait, its oil traders prefer to keep laden tankers anchored for some time near ports of Linggi and Tanjung Pelepas.

The accumulation of Iranian oil in the Malacca Strait coincides with a notable decline in China’s Iranian crude imports in July. This is a striking break with this year’s initial trend as in January-March 2025, Chinese imports of Iranian oil surged to an average of 1.5 million b/d, peaking at a record 2 million b/d in March.

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Mounting geopolitical pressure and shifting market dynamics appear to be prompting a quiet recalibration in China’s crude sourcing strategy. After the stellar start to 2025, Iranian oil imports to China first fell to around 1.5 million b/d in June to just 1.1 million b/d in July. This decline, despite the ease of access to Iran’s record floating storage volumes near Malaysia, suggests Chinese buyers are becoming more reluctant: not because of supply constraints, but due to growing anxiety over U.S. enforcement. The U.S. Treasury has already sanctioned three refineries in China’s Shandong province for processing Iranian crude in the spring of 2025, adding them to the OFAC list and effectively cutting them off from global financial networks. In the wake of these designations, larger Chinese refiners have grown increasingly cautious about engaging in transactions linked to Tehran.

US-sanctioned Chinese refiners

Refinery

Capacity

Sanctions date

Shandong Shouguang Luqing Petrochemical

100,000 b/d

March 20, 2025

Shandong Shengxing Chemical

44,000 b/d

April 16, 2025

Hebei Xinhai Chemical Group

120,000 b/d

May 8, 2025

Iran’s decision to anchor such volumes in Southeast Asia also reflects Tehran’s logistical and security calculations as the 12-day war with Israel heightened risks of keeping crude next to its shores. Situating the floating storage in Southeast Asia offers Tehran a strategic advantage. Notably, it shortens the logistical route were Chinese buyers to rekindle their interest – a tanker from Singapore can reach Qingdao in around 7-8 days, compared to a roughly 20-day voyage from Iran’s Kharg Island oil export port.

The huge buildup in Iranian floating storage, however, places Malaysia in an increasingly delicate geopolitical situation. The U.S. administration has made clear that if Malaysia is perceived as complacent in curbing illicit oil trade, it could become the next target of Trump’s favored punitive tool, tariffs. While Malaysian authorities have taken visible enforcement actions, including the detention of several tankers engaged in undocumented STS operations in 2023 and 2024, there is not much they can do – their jurisdiction ends at the limits of territorial waters. Moreover, Malaysia itself has been trying to boost trade relations with Beijing and has to be very cautious not to offend either side in its balancing act between two giants.

By lowering its Iranian intake, China appears to be broadening its crude supply base to reduce exposure to further US punitive measures. In July, imports of Russia’s ESPO blend rose sharply to over 900,000 b/d – a 30% increase from March and the highest level in 4 months, according to Kpler shipping data. This shift points to a strategic effort to minimize exposure to politically sensitive supply routes while safeguarding energy security.

Whilst Chinese refiners publicly express their concerns over Iranian oil imports, they will soon face a watershed moment when not buying discounted Iranian oil would be too big of a temptation. Prices for Iran’s main export grade Iranian Light have been plunging on the heels of the ongoing buildup in floating tankers around the Singapore/Malaysia area – making Iranian barrels increasingly difficult to ignore. Iran’s export grade has seen its discount deepen for six consecutive months. Before U.S. sanctions were imposed on Luqing, the first of three Chinese refineries sanctioned in March, Iranian Light was trading at just $0.80 per barrel below ICE Brent. By the end of July, the discount had widened to $3.50-4.00 per barrel.

At such steep discounts, Iranian crude may soon become too profitable for Chinese refiners to resist — especially for smaller, price-sensitive players. The tension between economic incentive and regulatory risk is likely to intensify as sanctions pressure persists and Iranian inventories continue to accumulate offshore.

An additional incentive to resume Iranian crude purchases may come from growing uncertainty around the future of Russian oil trade. The Trump administration has already imposed an additional 25% tariff on Indian refiners importing Russian crude, effective August 27, signaling a potential shift toward broader secondary trade penalties. While Washington and Beijing are currently engaged in negotiations tied to a broader truce, that agreement is set to expire on August 12. Although President Trump has claimed progress in the talks, he has not ruled out the possibility of extending secondary sanctions on China. 

While Beijing maintains that its energy policy is guided by national interest, the evolving sanctions landscape may prompt Chinese officials to reassess the relative risks of dealing with Tehran. In that context, Iranian oil — long stigmatized but now heavily discounted — may begin to look like a more acceptable option.

By Natalia Katona for Oilprice.com

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