[PARIS] Oil buyers and traders across Asia are watching the escalation of a conflict around Iran with bated breath, as the top importing region braces for the impact of any disruption of exports from the Persian Gulf.
Asia buys more than four-fifths of all the crude produced in the Middle East, and 90 per cent of that goes through the Strait of Hormuz, according to data from Kpler.
Here are three key concerns for the Asian market as the conflict expands:
The Iran-China link
China, the world’s largest oil refiner, gets about 14 per cent of its crude from Iran, Kpler data show. Actual flows are likely higher, with some imports from the Islamic Republic masked as shipments from not just Malaysia, but also the United Arab Emirates and Oman, in order to circumvent US sanctions.
While China’s larger state-owned processors seek to avoid breaching the bans, the country does not as a whole recognize unilateral US sanctions. And these discounted flows are vital for a hard-pressed private refining sector.
There’s growing concern those shipments could be disrupted. That has boosted demand for crude that can load on the Indian Ocean side of the Strait, including Abu Dhabi’s Murban and Omani crude. Other grades that may benefit from any threat to Iranian flows are Russian ESPO, which loads from the Far East port of Kozmino, as well as Angolan varieties.
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Iran’s fuel exports
Iran does not just ship crude – it is also a sizable exporter of fuel oil, selling mostly high-sulfur varieties used for shipping or as refinery feedstocks.
Much of that supply eventually finds its way into ship-refueling hubs including Fujairah in the UAE, Singapore and Malaysia. The so-called straight-run fuel oil that can replace crude is typically exported to the relatively simple, low-margin processors in China known as teapots.
Iran also has a lot of natural gas – sharing one of the world’s largest deposits with Qatar. While the Islamic Republic uses most of that domestically, it sells by-products including liquefied petroleum gas and condensates internationally.
China’s giant plastics sector relies on Iran for almost a quarter of its imports of LPG, which can be used for cooking and heating but also processed into petrochemicals used as plastic building blocks. That relationship has only intensified after flows from the US, traditionally China’s largest supplier, collapsed because of trade conflicts earlier this year.
“If there is a complete stoppage of Iranian LPG material or even, say, a halving of the average intake to China, China has few alternatives of substance,” said Samantha Hartke, head of market analysis for the Americas at Vortexa.
Iran’s influence on key shipping routes
The vast majority of Asia’s imports come through the Strait of Hormuz, making this waterway a focus for oil merchants. While Iran may choose not to block the conduit, it’s also able to threaten the safety of navigation through the Red Sea – the shortest route between Asia and Europe – using proxies such as Yemen’s Houthis. About 9 per cent of global seaborne trade normally passes through the Bab el-Mandeb chokepoint, or more than US$2 trillion worth of goods a year.
That may affect Asia’s supply from Russia, which has turned to markets in the East after being increasingly shunned by the US and traditional buyers in Europe because of its invasion of Ukraine in 2022. Ships carrying those massive volumes – ranging from flagship Urals crude to naphtha – must decide whether they continue to risk the Red Sea route, or face weeks of delays by going around South Africa instead. BLOOMBERG
