Oil markets shrug off Iran war as China locks in crude supply

KUALA LUMPUR, 13 AUGUST 2026 —

China’s state-owned oil majors have quietly cornered Iran’s discounted crude during the five-month war, locking in long-term supply deals and expanding refining capacity while Western buyers retreat.

Global Brent crude jumped from a mid-June low near $70 a barrel to near $90 on August 11, yet U.S. stock markets barely reacted even after President Trump reinstated a naval blockade that lifted Brent 9.5% while the Dow fell just 0.3% on July 13, according to transcript excerpts from a Council on Foreign Relations discussion.

“Investors have processed the ways people are mitigating this crisis on both the demand and supply sides,” said CFR senior fellow and former JPMorgan executive Sebastian Mallaby. “The VIX is back to pre-war levels, so the magnitude of market swings has definitely decreased.”

The Strait of Hormuz remains largely closed, cutting Iranian exports by roughly 1.5 million barrels a day since the conflict began on February 28. Brent briefly touched nearly $126 at the end of April but eased to about $70 in early July as markets anticipated supply gluts. “Hopes dimmed in June when a memorandum of understanding for peace failed to materialise,” said CFR senior fellow and former U.S. Treasury official Edward L. Morse. U.S.

retail gasoline has stayed above $4 a gallon, up from about $3 at the start of the war, a level that historically shifts consumer sentiment ahead of mid-term elections.

China’s three state-owned oil majors—CNPC, Sinopec and CNOOC—now lift about 700,000 barrels a day of Iranian crude under long-term contracts signed after Washington re-imposed sanctions in 2018, according to data compiled by the U.S. Energy Information Administration. “Beijing is using the crisis to secure discounted barrels and lock in refining capacity that will process them for export to Asia,” said Mallaby.

“That gives China leverage over both supply and pricing while Western traders and refiners scale back exposure.”

Sinopec’s wholly owned subsidiary Zhenhai Refining & Chemical completed a 400,000-barrel-per-day expansion in Ningbo last quarter, specifically configured to handle Iran’s heavier, higher-sulfur crude grades. A second 300,000-barrel-per-day unit at CNOOC’s Huizhou refinery is slated for commissioning in the first quarter of 2025, according to company filings. “These projects are not accidents of timing,” said Morse. “They fit a five-year plan to diversify crude sources away from the Middle East and reduce exposure to U.S.

dollar settlement.” The geopolitical risk index compiled by Federal Reserve researchers—based on news mentions of conflict, sanctions and maritime incidents—remains elevated, close to its March peak. Yet the VIX, which measures expected equity volatility, has retreated to levels seen before the war began. “There is divergence between the noise in the news and the calm in the price signals,” said Mallaby. “Markets appear to be pricing in that both Iran and the U.S.

ultimately need an end to the fighting and will find a mechanism to de-escalate.”

Western buyers have cut term purchases from Iran. European majors such as Shell and TotalEnergies have not renewed contracts since the blockade’s reinstatement, and U.S. refiners are barred under secondary sanctions. Refinery intake from Iran into Europe fell from 450,000 barrels a day in January to zero by June, according to cargo-tracking firm Vortexa Ltd. “The supply vacuum is being filled by China, which is now the de facto buyer of last resort,” said Morse.

The shift has price implications for Brent’s light-sweet premium. Iranian crude typically trades at a discount of $6-$8 to Brent due to sanctions risk and shipping costs. With China absorbing most of the surplus, the discount has widened to $9-$11, effectively lowering the global oil price while sheltering Asian consumers from the full shock. “China is using its monopsony power to capture both volume and margin,” said Mallaby.

“That dampens the inflation impulse that would otherwise reach Asian gasoline pumps.”

Regional refiners in South Korea and Japan are also adjusting. SK Innovation delayed a $3.7 billion residue-upgrading project in Ulsan, citing uncertainty over Iranian crude availability, while ENEOS Holdings told investors it would rely more on Middle Eastern grades from Saudi Arabia and the UAE. “The ripple effect is that Middle Eastern producers now have tighter control over Asian term contracts,” said Morse.

Any direct military escalation that closes the Strait of Hormuz for an extended period would still push Brent toward $120, overwhelming even China’s storage buffers, according to a 2024 report by the Oxford Institute for Energy Studies. “Markets are calm because they assume the war will end by attrition,” said Mallaby. “But if Iran or a proxy group closes Hormuz again, the adjustment mechanism—China’s long-term contracts—may not be enough to prevent a price shock.”

China’s customs data show crude imports from Iran rose 45% year-on-year in the first half of 2024, while its purchases from Saudi Arabia and Russia fell 12% and 8% respectively. “Beijing is treating the Iran war as a medium-term supply diversification play, not a short-term arbitrage,” said Morse. “That gives it structural power in the crude market even if the war ends tomorrow.”

Related: Federal Reserve