China’s Appetite for Illicit Oil Has Been Huge. Now, That’s Becoming More Difficult.

U.S. Seizes Oil Tanker in the North Atlantic

Last week, the U.S. military published an image showing the capture of an oil tanker in the North Atlantic, underscoring its ongoing efforts to disrupt sanctioned oil shipments.

Oil Markets Remain Steady Amid U.S. Actions in Venezuela

Despite recent events, global oil prices have remained relatively stable. The U.S. operation in Venezuela is putting strain on the illicit oil trade, particularly affecting China, the largest buyer of sanctioned crude.

Brent crude, the primary international oil benchmark, is hovering near $63 per barrel, with only a modest increase since President Nicolás Maduro’s capture. While some Venezuelan supply has already been factored into futures prices, it will take time for these changes to impact the physical oil market. Even if Venezuela experiences a smooth political transition, restoring the country’s oil infrastructure and increasing output could take years.

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Sanctions and the Shadow Oil Market

The U.S. blockade of Venezuela and the recent seizure of oil tankers serve as a stark warning to those trading in sanctioned oil. According to Kpler, oil under Western sanctions now accounts for a record 15% of global supply. The fleet of vessels moving this oil has grown to represent one-fifth of the world’s total shipping capacity, as reported by Lloyd’s List.

Western nations are intensifying their crackdown on these tankers; the U.S. intercepted three in international waters last week. With oil prices low and supply abundant, American and European leaders have a rare opportunity to target illicit oil trading without sparking a surge in energy costs for consumers.

China Faces Challenges as Venezuela’s Oil Flows Shift

The removal of Maduro poses difficulties for China, which, along with India, has been a major recipient of discounted oil resulting from Western sanctions. Data from Kpler indicates that China sources about one-third of its oil imports from Iran, Russia, and Venezuela.

This strategy has helped China reduce its energy expenses. In November, Chinese buyers paid nearly $9 less per barrel for Venezuelan oil compared to similar Canadian crude, according to Argus Media.

Now, the approximately 500,000 barrels per day of Venezuelan crude that previously went to China are expected to be redirected to U.S. refineries on the Gulf Coast. The White House has announced plans to gradually ease sanctions on Venezuela, which will move supply from the black market to legitimate channels, narrowing the price gap and quickly increasing Venezuela’s oil revenues.

China’s Oil Supply Strategy Faces New Uncertainties

Although heavy crude from Canada and other nations has become more affordable in anticipation of the U.S. replacing Canadian barrels with Venezuelan oil, these alternatives remain costlier than what China has been paying.

China’s approach of purchasing discounted sanctioned oil has left it exposed to supply disruptions. The recent U.S. intervention in Venezuela marks the third time in less than a year that China’s energy imports have been threatened by American policy.

Last summer, Israeli strikes on Iran, supported by the U.S., raised concerns among Chinese buyers about potential attacks on Iran’s energy infrastructure. Independent refineries in China’s Shandong province process 90% of Iran’s sanctioned crude.

In October, the U.S. imposed sanctions on Russian oil companies Lukoil and Rosneft, increasing the risks of buying Russian crude. The latest developments in Venezuela reinforce China’s decision to stockpile oil, with purchases far exceeding domestic demand and being stored for future use.

According to Tom Reed, vice president of China crude at Argus Media, China’s reserves of heavy crude are sufficient until March. After that, the country may need to seek new suppliers, such as Canada or Colombia.

Looking ahead, Beijing may need to reconsider its investments in Latin America, especially as the Trump administration appears intent on limiting Russian and Chinese influence in the region. China Concord Resources Corp. has recently begun developing two oil fields in Venezuela and plans to invest over $1 billion to reach a production target of 60,000 barrels per day by the end of 2026, according to J.P. Morgan analysts. The future of these and other projects is now uncertain. Meanwhile, Iran is also becoming a less dependable partner as domestic unrest continues.

Risks Grow as Crackdown on Illicit Oil Intensifies

Efforts to curb illegal oil trading carry significant risks, even with the current oversupply. Russia is increasingly assertive in protecting its shadow fleet; last week, it deployed a submarine to the North Atlantic as the U.S. Coast Guard pursued a tanker. Last year, Russian jets entered Estonian airspace after Estonia’s navy attempted to detain a Russian vessel.

Russia is now allowing more ships carrying sanctioned oil to operate openly under its flag, a shift from previous tactics of concealing the oil’s origin. This may be a test to see if Western nations are willing to seize more Russian vessels. Lloyd’s List reports that 42 ships have switched to the Russian flag in the past six months.

Despite the abundance of oil, official prices are not reflecting the underlying geopolitical risks. The sanctioned oil market is under increasing strain, with millions of barrels stranded at sea as enforcement tightens and producers seek ways around new restrictions. The black market has grown to 6 million barrels per day, and any further disruptions could quickly drive up official oil prices.

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