Why China will keep importing Iranian crude, but volumes will remain limited

On 22 July, 2019, US Secretary of State Mike Pompeo announced the US’s decision to impose sanctions on a Chinese trader, Zhuhai Zhenrong, and its chief executive for ‘knowingly purchasing or acquiring oil from Iran, contrary to US sanctions’. While the US State Department’s decision to designate a Chinese entity may be seen as a sign of further escalation in the already fraught relations between the US and China, in reality, the choice of Zhuhai Zhenrong allows both the US and China to maintain opposing diplomatic stances on Iran. The US can affirm its ‘maximum economic pressure’ campaign while China can continue importing limited volumes of Iranian oil without exposing its largest traders to US sanctions. As a result, Chinese oil imports from Iran are set to drop slightly from their average levels of 0.45 mb/d in the first half of 2019 (H1 2019), but they are unlikely to go to zero. But as Beijing is unlikely to cut purchases from Iran (both crude oil and LPG) to zero, there is still a risk that China’s imports of Iranian crude could become a bigger irritant in US-China relations. Indeed, if import volumes rise considerably over several months, or if the US seeks to squeeze Iran even further and decides Chinese imports should go to zero, China will face a difficult choice given the prospect of additional sanctions. Since the US has taken Chinese telecoms giant Huawei to task, it is no longer unconceivable that it would consider designating a Chinese oil and gas major.

By: Michal Meidan