Chinese refiners are paying a hefty premium for Russia's ESPO crude as they seek a replacement for Iranian crude that independent refiners had been importing before the United States installed a naval blockade on Iran.

East Siberia-Pacific Ocean crude, or ESPO, for delivery in November is trading at a premium of more than $7 per barrel, with offers reaching as high as $10 per barrel over Brent crude, Bloomberg reported, citing traders. The blend is loaded from Russia's Far East coast and can reach buyers in China in less than a week. That short voyage is one reason ESPO has become the natural substitute for Iranian barrels among China's independent "teapot" refiners in Shandong, which have historically relied on discounted Iranian and Russian grades to feed their processing runs.

China remains the biggest buyer of ESPO crude, accounting for a market share of 83% in the first seven months of the year. That share, however, is down from 88% a year earlier. The shift reflects stronger ESPO buying by Indian refiners, whose market share of the Far Eastern Russian blend rose from 12% to 16% over the first seven months of the year, according to data from Kpler and Vortexa. Total oil exports from Russia's Far Eastern port of Kozmino ticked up by 6% over the same period.

India increased its ESPO imports due to a slump in overall Chinese oil imports between May and June, as well as supply disruptions in the Middle East that delayed many term cargoes Indian refiners had been expecting in the early summer.

Indian refiners normally prefer the Urals blend, but they have warmed up to ESPO even though it takes longer to reach its destinations in India and is costlier than Urals. Energy analysts note, however, that the Far Eastern blend serves as a good backup option for Indian buyers during times of disruption.

The premiums also underscore the balancing act buyers of Russian crude face under Western sanctions. Since the G7 price cap was imposed on Russian oil, trade in ESPO has largely shifted to tankers and insurers outside Western oversight, and buyers must weigh discounted Russian grades against freight, sanction-related costs, and, in China's case, the loss of cheap Iranian supply. Rising competition between Chinese and Indian refiners for the same Far Eastern barrels adds further pressure on the differentials traders watch.

Meanwhile, India's crude oil imports from Russia are estimated to have eased in August from July's record high, as Ukrainian attacks on Russian export infrastructure and competition from China for Russia's barrels have dented India's intake of Moscow's oil.

Source: OilPrice.com — By Irina Slav for Oilprice.com