Asia’s Largest Oil Buyers Are Running Low on Hormuz Alternatives
Asia’s largest oil buyers have been able to lean on workarounds to limit the impact of more than seven weeks of war in the Persian Gulf, shielding not only their own economies but those of neighbors competing for cargoes.
That luck is beginning to run out.
To cope with an unprecedented energy shock, China and India have turned to everything from bilateral agreements with Tehran to tapping cargoes of Russian and Iranian oil already on the water. But now those floating supplies are slowly drying up and — to make matters worse — traffic through the Strait of Hormuz is at a standstill, with even blacklisted vessels that serve China’s private refining sector hesitant to test a US blockade.
India is unquestionably the more vulnerable of the two. It leans on the Gulf not only for crude but for liquefied petroleum gas, used for cooking, where shortages have been acute. With limited stockpiles, the world’s third-largest oil importer has cranked up Russian shipments to fill the gap, largely protected by US waivers.
Refiners say they are covered for the coming month — but prices are far from discounts seen in the years since the invasion of Ukraine, and the volume of oil on the water is rapidly shrinking.
In mid-February, there were 20 million barrels of Russian crude in floating storage and available to be bought. That is now down to less than 5 million, according to Anoop Singh, global head of shipping research at Oil Brokerage Ltd. Data intelligence firm Vortexa Ltd. puts the figure at close to three million barrels.
India had also managed to secure safe passage for LPG and other carriers through the Strait of Hormuz, after a bilateral deal with Iran. But after a chaotic weekend, when two of its vessels came under attack while attempting to cross the waterway, the government summoned Tehran’s ambassador and has put off plans to send empty vessels into the Gulf for loading.
The government has taken up the issue with Iran “very strictly”, Randhir Jaiswal, spokesperson for Ministry of External Affairs, told reporters on Monday.
Iranian cargoes, already complicated for conservative Indian refiners given other sanctions in place, are now off the table entirely, after Washington allowed a temporary permit for Iranian oil to lapse at the weekend.
As a result, consumers in the world’s most populous nation are now bracing for the first widespread increase in diesel prices in four years, with hikes by state-owned refiners expected into next week after state elections wrap up. That, combined with a weak currency, will stoke inflation and eat into economic growth.
Next steps could include additional export curbs, according to Oil Brokerage’s Singh — something China and others have already begun, as India struggles to keep run rates high and domestic demand met.
China is in a better place, thanks to years of focusing on energy security, plus more than 1 billion barrels in reserves and significant power as the world’s top consumer. Smaller economies are more liable to be squeezed out by larger neighbors, but even Beijing is feeling the impact of higher prices as flows dry up in the face of an unprecedented energy crunch — without the Strait of Hormuz, global supply shrank 10% last month, according to the International Energy Agency.
State-owned processors have already cut back.
With Iranian cargoes no longer exempt from Hormuz restrictions, thanks to a US blockade, pressure is increasing too on private refiners, the so-called teapots which account for as much as a fifth of China’s refining capacity, left to face both higher prices and reduced supply.
Xavier Tang, a senior market analyst at Vortexa, said he expected a fall in Iranian oil in transit as the US blockade cuts off a steady stream even through the war, “although not at a fast pace.” Vortexa estimates Iran currently has around 160 million barrels of oil on water, a term which refers to cargoes loaded and in transit — just slightly less than in February before the war.
The figure is healthy by historic standards, but a rise in Russian prices has pushed up Iran too — and once-deep discounts for grades like Russia’s ESPO or Iranian crude have turned into premiums, as buyers rush to find ready replacements for Middle East shipments. All the while, risks have increased as the US doubles down on secondary sanctions — adding even greater pressure for teapots, instructed to keep up output at all costs.
“All of Asia is looking at very constrained oil supplies,” Oil Brokerage’s Singh said. “With every passing day the war is hurting more nations, sparing no one.”
bloomberg.com
