President Donald Trump has taken a dual-track strategy with
Iran, applying a "maximum pressure" campaign of tightening
economic sanctions, while simultaneously engaging in direct high-level talks
over Tehran’s nuclear program. Last week, Trump indicated the sides were getting
very close to a deal.
Of course, nuclear talks between Iran and Western powers
have always been extremely complex – full of stops and starts – and Trump’s
recent statements surrounding a potential deal include much hedging.
If there is a breakthrough deal, it would almost certainly
include a repeal of many US economic restrictions on Iran’s oil industry, which
would have a profound impact on global energy markets.
Strict US sanctions on Iran’s oil industry have been in
place since Trump pulled out of an UN-backed nuclear deal in 2018.
While sanctions have dented Tehran’s exports – the country’s major source of
revenue – they have never succeeded in reducing exports to zero, as Trump vowed
seven years ago.
Iranian exports reached 2.8 million barrels per day (bpd) in
May 2018 and hit a low of just 150,000 bpd in May 2020, before steadily
recovering to an average of around 1.65 million bpd so far in 2025, according
to analytics firm Kpler.
Chinese privately owned refineries, commonly known as
teapots, have been the main buyers of Iranian crude in recent years, attracted
by the heavy discounts. Concentrated in the eastern Shandong province, these
small independent refineries have capacity of around 4 million bpd, or roughly
one-fifth of China’s total refining capacity.
Large volumes of sanctioned crude have made their way into
China in recent years through a complex web of shell companies and a
so-called "dark fleet" of tankers that transfer oil between different
vessels to obscure the origin.
The precise total volumes involved in this trade are unclear
as official Chinese customs data suggests the country does not import any
Iranian oil. However, Kpler, using ship tracking and satellite technology,
estimates that China imported 77% of Iran’s 1.6 million bpd of exports last
year.
Iranian production could also likely be ramped up quickly.
Its oil sector has proven surprisingly resilient in the face
of mounting Western sanctions, with crude oil production averaging 3.3 million
bpd in 2024, according to OPEC data. Production could be ramped up by 500,000
bpd within six months of lifting sanctions.
Not only would the rapid return of Iranian crude to global
markets likely put further downward pressure on oil prices that have fallen
from a high of US$82 a barrel in January to around US$65 today, but it would
also deal a heavy blow to China’s teapot refineries.
These independent outfits typically have very slim profit
margins because most run at utilization rates of around 50% or less due
to overcapacity in the sector and restrictions on exporting fuels overseas.
Plants have faced fierce competition in recent years, and
those that have survived have done so largely because they have been able to
generate lucrative profits by processing cheap Iranian as well as Venezuelan
feedstock.
The removal of US sanctions on Iranian crude could therefore
undermine their business models, meaning many plants would likely have to
sharply pare back operations or, in some cases, shut down entirely.
A drop in output from Chinese teapots, in turn, could
provide a boost to large state-owned Chinese refineries that will pick up the
slack in the domestic market.
More broadly, a decline in global refining capacity should
boost the sector at a time of increasing uncertainty over demand for fuels such
as gasoline and diesel due to the ongoing trade war and energy transition.
The return of Iran into global oil markets would create
headaches for many – not least Saudi Arabia, which is in the middle of a
price war – but the biggest losers would likely be the independent Chinese
refiners. And the biggest beneficiary, outside of Iran itself, would be the
refining industry – whether or not that’s what Trump has in mind.
