NEW YORK: Iran is reducing the price of its already cheap crude even more as a top ally gains a bigger foothold in the key Chinese market.

China has become an important destination for Russian oil as Moscow seeks to maintain flows, following the fallout from its invasion of Ukraine.

That’s led to increased competition with Iran in one of the few remaining markets for its crude shipments, which have been significantly curtailed by United States sanctions.

Russian exports to China surged to a record in May, with the Oragnisation of Petroleum Exporting Countries and its allies overtaking its cartel ally Saudi Arabia as the top supplier to the world’s biggest importer.

While Iran has cut its oil prices to remain competitive in the Chinese market, it’s still maintaining robust flows, likely in part due to rising demand as China eases strict virus restrictions that had crushed consumption.

“This is likely to make the Gulf producers uneasy, seeing their prized markets taken over by heavily discounted crude,” said Vandana Hari, founder of Vanda Insights in Singapore.

China’s official data only lists three months of imports from Iran since the end of 2020, including in January and May this year, but third-party figures indicate a steady flow.

After a slight decline in April, imports have been over 700,000 barrels a day in May and June, according to Kpler.

Industry consultant FGE said Russian Urals have displaced some Iranian barrels.

Iranian oil has been priced at nearly US$10 a barrel below Brent futures to put it on par with Urals cargoes that are due to arrive in China in August, according to traders.

That compares with a discount of about US$4 to US$5 prior to the invasion. Iran’s light and heavy grades are most comparable to Urals.

China’s independent refiners are major buyers of Russian and Iranian crudes, and cheap supplies are important because they’re constrained by rules around exporting fuels, unlike state-run processors.

Known as teapots, they are not given quotas to ship fuels to overseas markets, where prices have surged on a supply crunch. Instead, they supply the domestic market and have incurred losses as virus lockdowns sapped demand.

 - Bloomberg