Strategic Shift in Global Heavy Crude Markets: Iran and Russia to Fill Venezuela's Void in China's Refining Sector

The global heavy crude oil market is undergoing a seismic realignment as China's refining sector adapts to the unraveling of Venezuela's once-dominant crude exports. For years, Venezuela's Merey crude-renowned for its high asphalt yield and steep discounts-was a cornerstone of Chinese refiners' cost-competitive strategies. However, U.S. sanctions and military interventions have disrupted this flow, forcing China to pivot toward alternatives. This shift, driven by geopolitical pressures and supply chain fragility, is reshaping oil differentials and refining margins, with profound implications for global energy markets.

Venezuela's Decline and the Rise of Alternatives

Venezuela's crude exports to China, which peaked at 613,000 barrels per day in November 2025, have become increasingly precarious. U.S. naval actions and sanctions on key infrastructure have raised shipping costs and created logistical bottlenecks, narrowing Merey's discount to Brent from $15 to $13 per barrel by late 2025. Chinese refiners, particularly independent "teapot" operators, are now seeking substitutes. Yet alternatives like Iranian Extra Heavy crude- offering only 10-13% asphalt yield compared to Merey's 60%-are ill-suited for China's bitumen-focused refining needs. Russian crude, while abundant, is often too light for such applications, further complicating the transition.

Iran and Russia, however, are filling the void in other ways. Russian naphtha has become critical for blending with Venezuela's heavy crude to produce exportable grades, a role previously held by Iranian imports. Meanwhile, China's state oil companies have suspended purchases of seaborne Russian crude following U.S. sanctions on Rosneft and Lukoil, though smaller buyers continue to source discounted Russian oil. This bifurcation in China's procurement strategy-relying on sanctioned and non-sanctioned entities-highlights the lengths to which the country is going to maintain energy security.

Oil Differentials and Refining Margins: A Tenuous Balance

The narrowing of Merey's discount to Brent reflects the growing risks associated with Venezuela's exports. In November 2025, Merey traded at a $14–$15 per barrel discount to Brent on a delivered China basis, up from $7–$8 earlier in the year. This premium for risk has eroded refining margins for Chinese buyers, who now face higher costs and supply uncertainty. By contrast, Russian ESPO crude has traded at a negative differential of -$6 per barrel against Brent in China, offering a more stable but less optimal feedstock.

The shift to alternatives is further squeezing margins. Iranian crude, while available at a discount, lacks the asphalt yield of Merey, forcing refiners to either blend with lighter crudes or accept lower profitability. Some Chinese operators are turning to non-sanctioned heavy crudes like Canada's TMX low-TAN or Colombia's Castilla, which currently trade at $4.40 and $2.60 discounts to Brent, respectively. While these options mitigate supply risks, they come at a higher cost, reducing the economic appeal of heavy crude processing.

Geopolitical Realignment and Long-Term Implications

The reallocation of Venezuela's crude exports could have lasting consequences. U.S. refiners, better equipped to process heavy crude, stand to benefit if Venezuela's production resumes. This would displace Canadian and Middle Eastern crude in the U.S. Gulf Coast, where refineries could capitalize on Venezuela's lower capital intensity compared to Canadian heavy crude. For China, the transition to alternatives may force a reevaluation of refining strategies, with state-owned enterprises potentially stepping in to offset declines in independent refiner output.

Meanwhile, the global oil market is bracing for a recalibration of differentials. China's strategic crude inventories-up 900,000 bpd between January and August 2025-have cushioned short-term price volatility but may not sustain long-term demand. As refining margins in Europe and Asia hit two-year highs in November 2025, driven by supply disruptions and depleted product stocks, the pressure on Chinese refiners to optimize costs will intensify.

Conclusion: A New Equilibrium in the Making

The realignment of China's heavy crude imports underscores the fragility of energy supply chains in a multipolar world. While Iran and Russia are stepping in to fill Venezuela's void, the economic and logistical challenges of this transition are reshaping oil differentials and refining margins. For investors, the key takeaway lies in the interplay between geopolitical risk and market fundamentals: U.S. refiners may gain a competitive edge if Venezuela's production stabilizes, while Chinese operators face a prolonged period of margin compression as they adapt to a less optimal crude mix. In this evolving landscape, resilience-both geopolitical and economic-will determine the winners and losers in the global heavy crude market.