China has cut oil imports from Iran by nearly 50 percent, but its response to U.S. sanctions over Tehran's nuclear program remains unclear, analysts say.
In February, crude imports from Iran fell to less than 290,000 barrels per day, declining 40 percent from a year earlier and nearly half from December levels, according to China's customs data.
So far this year, Iran has dropped from third to fifth place among China's oil suppliers.
Analysts have been watching for signs that China will cooperate with U.S. sanctions signed into law in December that seek to bar transactions with the Central Bank of Iran.
The curbs are designed to pressure Iran's nuclear program by threatening to ban correspondent accounts of foreign banks in the United States if they are linked to petroleum deals with Tehran.
On March 20, U.S. Secretary of State Hillary Clinton announced exemptions for Japan and 10 European countries in keeping with the legislation after they "significantly reduced" their oil imports from Iran.
"We commend these countries for their actions and urge other countries that import oil from Iran to follow their example," Clinton said in a prepared statement.
On March 30, President Obama determined that "there currently appears to be sufficient supply of non-Iranian oil" in world markets that would permit significant reductions in Iranian imports, the White House said.
In its latest statement on the sanctions, China's Foreign Ministry underscored its opposition to the measure.
"The Chinese side always opposes one country unilaterally imposing sanctions against another according to domestic law," the ministry said on March 31.
The question that remains is whether China's cuts are tacitly aimed at cooperating with the sanctions and avoiding penalties that could be invoked in June against Iran's biggest oil customer.
Trevor Houser, a China energy expert and partner at the Rhodium Group consulting firm in New York, said China's cuts so far are "not the result of Beijing's policy."
Instead, they may be tied to a contract spat that Unipec, the trading arm of China's state-owned refiner Sinopec, had been embroiled in since last year with the National Iranian Oil Co. (NIOC).
"The reductions in January and February were the result of a pricing dispute between Unipec and NIOC," Houser said in an interview.
The two sides were negotiating the price and level of 2012 term contracts, which were not agreed until March. In the meantime, Unipec reduced its imports, resulting in the lower Chinese volumes, Houser said.
Now, Sinopec has signed term contracts with Iran for the rest of 2012 at levels slightly lower than those for last year, he said. Purchases would be 10 to 20 percent less, Reuters reported, citing an unnamed Chinese industry executive.
As a result, Chinese customs figures may show reductions for another two months because of transit times from the Persian Gulf.
"But after that, it's going to rebound," Houser said. "The question is for the summer months and the second half of the year, does Beijing provide explicit guidance to the Chinese oil companies to reduce the amount of Iranian oil that they buy?"
Despite China's official stand against the U.S. penalties, it is unclear whether it will decide to defy the curbs.
"Opposing the sanctions doesn't inoculate their banks against the very real risks of being sanctioned by the United States," Houser said.
The question may hinge on whether China can afford to do without Iranian oil.
In January, the European Union approved measures that would phase out all Iranian oil contracts with its 27 member nations by July.
So far, China has offset cuts in Iranian oil with increases in supplies from countries including Russia, Saudi Arabia, Iraq, and Venezuela.
At the February level, Iranian crude accounts for 4.8 percent of China's imports, down from nearly 11 percent last year, based on RFA calculations. In 2011, Iran supplied about 6 percent of China's estimated oil demand.
'Wait and see'
Edward Chow, senior fellow in the energy and national security program at the Center for Strategic and International Studies in Washington, said Beijing may not have decided yet whether to comply or not.
"My guess is that China is going to take a wait-and-see attitude," said Chow. "The sanctions are new and they don't know how it's all going to play out."
Chow said companies and countries may find themselves in a quandary over the sanctions, which were passed as an amendment to the U.S.'s National Defense Authorization Act.
The terms call for "significant" reductions in Iranian oil imports, without specifying exact numbers.
"It's kind of hard for a country or company to know at this point. It seems to be a negotiated number," Chow said.
China would be reluctant to negotiate on an issue related to a unilateral sanction, he said. On the other hand, it has financial interests at stake.
"Clearly, a lot of these Chinese companies have equities in the United States that they have to protect," said Chow.
Another complication is insurance for shipments. Last week, Reuters reported that a major Chinese maritime insurer plans to halt indemnity coverage for transit from Iran.
Among the many other questions is the effect on world oil prices, whether China reduces Iranian oil imports or not.
"If you look at any single country, you can always say they can manage by replacing it with other crudes in the marketplace," Chow said.
"The larger problem is, can the world afford to have a significant reduction of some 2.25 million barrels per day of Iranian exports without impacting the market in a significant way?" he said. "The answer to that is probably no."
A "significant" reduction may also mean something less than a cutoff.
Chow believes the chances are good that Washington and Beijing will strike a balance on the sanctions rather than come into conflict.
"I think the administration probably wants to have a reduction in Iranian crude exports," he said. "It may be happy that Iran will have to discount the price of their crude in order to move it, but it's not necessarily interested in a total embargo."
The outlook suggests that negotiations will be necessary in coming months.
"I think it's in both China's and the United States' interests to reach some kind of accommodation," Chow said. "How easy that's going to be is difficult to tell."