Following India's reduction in purchases, Russian and Iraqi oil producers are increasing discounts as they compete for a limited pool of Chinese buyers. According to a forecast by Rystad Energy, India's oil imports from Russia could fall by 40% from January levels to approximately 600,000 barrels per day. A significant volume of displaced oil is now shifting eastward, sparking a price war with Iranian suppliers, who have long been favored by China's private refineries.

Traders familiar with such transactions indicate that Russian Urals crude is currently selling at a discount of about $12 per barrel below the ICE Brent benchmark, compared to a $10 discount last month. Iranian Light crude is now offered at a discount of $11 per barrel below the global benchmark, widening from $8–9 in December.

China's independent refineries have historically acted as a "pressure valve" in the oil market, absorbing barrels avoided by other buyers. However, their capacity is limited, as they account for only about a quarter of China's total refining capacity and are subject to government-imposed import quotas.

With China unable to fully absorb the displaced crude, unsold oil is accumulating in Asian waters, leaving both Russia and Iran with dwindling options. The Russian government has already been forced to cut production, while Iran is attempting to export as much oil as possible amid preparations for potential U.S. military action.

Jianan Sun, an analyst at Energy Aspects, stated, "Chinese private refineries cannot take in more oil as their capacity may have already peaked," noting that sanctioned barrels are piling up in both onshore and offshore storage facilities.

Currently, Iran appears to be bearing the brunt as Russia forces its way into the market. Ship-tracking data show that Russian oil arrivals at Chinese ports increased to 2.09 million barrels per day in the first 18 days of February—a roughly 20% rise from January and about 50% higher than December.

In contrast, Iran's oil exports to China this year have averaged around 1.2 million barrels per day, down about 12% year-on-year, according to Kpler. The data intelligence firm estimates that nearly 48 million barrels of Iranian oil are currently at sea, up from around 33 million barrels in early February, with much of the increase observed in the Yellow Sea and the Singapore Strait.

Meanwhile, approximately 9.5 million barrels of Russian oil remain idling in Asian waters.

A large-scale U.S. attack on Iran could disrupt the country’s export capacity if oil facilities are targeted or shipping through the Strait of Hormuz is interrupted. The U.S. has deployed significant forces in the Middle East, and while the president has expressed a preference for a diplomatic resolution, he has also warned that failure to reach an agreement would be "very bad" for Iran.

Lin Ye, Vice President of Oil Markets at Rystad Energy, noted that optimism over a potential ceasefire in Ukraine has made Russian crude appear "relatively low-risk" for Chinese buyers.