Millions of barrels of Iranian crude are sitting in Chinese ports

Iranian tankers are quietly unloading their stocks in Chinese ports, according to vessel location data, despite sanctions imposed by the United States on crude oil from the Islamic Republic.

These flows, which according to experts show no sign of stopping, could seriously disrupt the US-China trade talks and oil markets if Beijing decided to use them.

Estimates of the volume of Iranian crude that has been shipped to China between January and May vary between 12 and 14 million barrels, an amount that market observers believe could have a significant impact on the price of oil.

"If China aggressively bought Iranian oil and / or used these stored volumes, oil prices would drop from $ 5.00 to $ 7.00 a barrel," CNF's John Kilduff, a founding partner of the oil company, told CNBC on Thursday. Energy trading Again Capital. "This would be a significant outlet for Iranian supplies that have been severely spoiled by sanctions."

Stephen Brennock, an badyst at PVM Oil Associates, agrees. "It is fair to badume that world oil prices would be under pressure if China decided to tap into Iranian oil stored in its ports," he said. "This would likely trigger a severe reaction from the (President Donald) Trump administration."

But there is at least one reason why Washington has not sounded the alarm about these Persian barrels. China keeps them in what is known as "bonded storage", which means that the oil has not been cleared by Chinese customs and is not used, which is not a violation of the sanctions imposed by the United States. Kilduff estimates that an additional 20 million barrels are "en route, probably destined for this bonded storage".

This benefits Iran and China in many ways.

Iranian stocks and floating stocks increase due to reduced exports – but he can not just stop pumping oil because his export capacity has collapsed. Indeed, leaving the oil underground could cause permanent damage to its oil wells. Thus, in the words of an badyst, "they must store this oil instead of endangering the future production of their oil fields."

Storage in Chinese storage warehouses offers Iran a practical solution which means that it is not necessary to use as many of its tankers as floating storage facilities.

The configuration also has advantages for Iran, said Kilduff, "because its oil is prepositioned on the Asian market, ready to be sold, if the sanctions are lifted, a financial circumvention is obtained, or via barter transactions. , where oil is traded for goods. "

At the same time, the situation benefits China because it enjoys a significant discount on oil and it serves as remuneration for work done by Chinese companies in Iran, according to badysts.

"Iranians are paying a lot of attention to these barrels at risk," Kilduff said. "So, it's a good deal."

Chinese storage is "a convenient place to store and offers Iranians and Chinese options, especially if the Chinese want to rule out US sanctions," Richard Nephew, program director of CNBC's Center on Global Energy Policy told CNBC. Columbia University. "Neither of them likes the ability of the US private sector and the private sector to track tankers." This helps to solve this problem, though we can all see how the storage is exploited. "

The Chinese Ministry of Commerce and the National Energy Administration have not responded to CNBC's requests for comment.

The Trump administration re-imposed heavy sanctions on Iran last year and tightened the knot of its oil exports last May after lifting the sanctions exemptions that allowed some of the world's biggest oil buyers Iran to continue to import it. This waiver list included China.

The new sanctions came after the United States withdrew the 2015 Iranian nuclear deal reached in May 2018 with the United States, which was to provide economic relief to Iran in exchange for its nuclear program. Tensions have soared between the two countries as Tehran begins to lower its nuclear enrichment limits under the agreement.

But crude stocks are also a handicap for China, say badysts, especially because of its trade dispute that has lasted more than a year with the Trump administration.

Iranian oil stored in China's bonded tanks still belongs to Tehran, specifically the National Iranian Oil Company, a state-owned company, and so must not violate any sanctions.

"However, such an approach is likely to provoke Washington's anger," said Brennock of PVM. "US sanctions on Chinese entities would inevitably be imposed, which, in turn, would add spice to their long-running business battle." The Chinese economy has already suffered greatly from the trade war with Washington, reaching its lowest growth rate in 27 years in the second quarter of 2019.

The Trump administration has so far imposed tariffs on Chinese goods worth $ 250 billion, while China has responded with royalties of $ 110 billion on US products. The US president has recently threatened new tariffs of 10% on 300 billion dollars of Chinese goods.

"It's a handicap for China because complying with the sanctions imposed by the United States is a serious matter," Kilduff said. "The very large state-owned Chinese refiners are major international players in the global oil and refined products market and can not and are not likely to be cut off from the US financial system. United could easily determine that the "bonded storage" is a euphemism for the landed supply. "

In the meantime, Tehran's sole responsibility is to "seriously dismiss" these suspicious barrels, Kilduff added. "The economic pressure is considerable."

According to Kilduff and Again Capital, an additional 20 million barrels are destined for China's bonded storage. What the Chinese decide to do with these barrels can determine whether they turn out to be a key in the trade war talks, a boon for China or a time bomb for the oil markets.