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.

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 $82 a barrel in January to around $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 U.S. 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.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Read More News on