China Refiners Face Yet Another Blow as Trump Presses Venezuela

The geopolitical landscape of global oil markets is once again shifting, as U.S. President Donald Trump's administration imposes new tariffs on countries importing Venezuelan oil. This move, set to take effect on April 2, 2025, adds another layer of complexity for China's refiners, who are already navigating the challenges posed by U.S. sanctions on Iranian oil. The new tariffs are part of a broader strategy to pressure Venezuela's regime and could have significant implications for China's crude oil imports and refining operations.

China, the world's largest importer of crude oil, has been diversifying its oil sources in response to various geopolitical and economic factors. In 2024, China imported 11.1 million barrels per day (b/d) of crude oil, with Russia, Saudi Arabia, Iraq, Oman, and Malaysia being the largest sources. However, China's imports from Venezuela are relatively small, making up a minor portion of its overall oil imports. Given the new tariffs, China may reduce its purchases from Venezuela and replace those barrels with oil from other sources not subject to U.S. sanctions. For instance, China could increase imports from Brazil, Canada, the United States, or countries in the Middle East. In February 2025, China's crude imports from Brazil were expected to hit an eight-month high, with full month volumes reaching 3 million metric tons, or 800,000 barrels per day (bpd). This shift in sourcing is already underway, as Chinese refiners have stepped up purchases of Brazilian and West African crude due to sanctions and tariff disruptions.

Moreover, China's newest refiner, Shandong Yulong Petrochemical, has recently bought a large volume of Western African crude for March and April delivery. This refiner, due to start its 200,000 bpd crude unit in March or April, has purchased four shipments of Angolan oil and one cargo of Nigerian Nemba for March delivery, as well as two April shipments of Brazilian crude. State trader Unipec has also bought more than 20 million barrels of Brazilian crude for April delivery.

The enhanced appetite for Brazilian and West African crude has pushed up premiums by about 50% since the U.S. sanctions on January 10, 2025. This trend is likely to continue as refiners seek to avoid Gulf crude due to high prices and the risks associated with sanctioned oil. Additionally, Beijing's 10% tariffs on U.S. crude imports make Brazilian Tupi and West Africa options more attractive for Chinese buyers after maxing out Canadian TMX grade purchases.

In response to the U.S. sanctions on Iranian and Venezuelan oil, Chinese refiners might make several strategic adjustments to mitigate the impact on their operations and the global oil market dynamics. Here are some potential adjustments and their implications:

1. Diversification of Oil Suppliers: Chinese refiners could increase their imports from countries not subject to U.S. sanctions. For instance, China's crude imports from Brazil and West African countries have already increased significantly. According to Reuters, "Chinese refiners have stepped up purchases of Brazilian and West African crude as they reorganise sourcing around sanctions and tariff disruptions, and after prices of Middle Eastern grades surged." This shift is evident in the data showing a 49% month-on-month increase in Brazilian crude and a 36% month-on-month rise in Angolan crude for China's expected imports in February 2025.

2. Increased Imports from Russia: China could further increase its imports from Russia, which has been a significant supplier. In 2024, China increased imports from Russia for the third consecutive year, averaging 2.2 million b/d, 1% more than in 2023. This trend is likely to continue as Russia offers discounted prices due to G7 import bans and sanctions.

3. Enhanced Sanctions-Proofing: Chinese refiners might invest in technologies and infrastructure to make their supply chains more resilient to sanctions. Esfandyar Batmanghelidj, CEO of the Bourse & Bazaar Foundation, noted that "in the medium term, this is the kind of move that will push China to 'sanctions-proof' its energy supply chain."

4. Shift to Petrochemical Production: China's National Development and Reform Commission has indicated a shift towards producing more petrochemical products and less fuel. This adjustment could reduce China's reliance on crude oil imports for fuel production and focus more on petrochemical manufacturing, which is less affected by sanctions.

5. Increased Domestic Production: China might accelerate efforts to increase its domestic crude oil production to reduce dependence on imports. However, given that China's domestic crude oil production averaged 4.3 million b/d in 2024, this option may have limited short-term impact.

Impact on Global Oil Market Dynamics:
- Price Volatility: The diversification of oil suppliers and increased imports from alternative sources could lead to price volatility as the market adjusts to new supply dynamics. For example, the surge in Brazilian and West African crude imports has already pushed up premiums by about 50% since the U.S. sanctions on January 10, 2025.
- Supply Chain Disruptions: The shift in supply chains could cause temporary disruptions as refiners adjust to new sources and logistics. This could lead to short-term supply shortages or surpluses in certain regions.
- Geopolitical Tensions: The U.S. sanctions and China's response could exacerbate geopolitical tensions, particularly between the U.S. and China. This could lead to further economic measures and retaliatory actions, affecting global trade and energy markets.
- Market Rebalancing: Over the medium to long term, the adjustments made by Chinese refiners could lead to a rebalancing of the global oil market. As China becomes more self-sufficient and diversifies its suppliers, the market could see a reduction in the influence of sanctioned countries like Iran and Venezuela.

In summary, Chinese refiners are likely to diversify their oil suppliers, increase imports from Russia, invest in sanctions-proofing, shift towards petrochemical production, and potentially increase domestic production. These adjustments could lead to price volatility, supply chain disruptions, increased geopolitical tensions, and a rebalancing of the global oil market.