For years, China has been buying discounted Iranian oil in bulk, and the U.S. sanctions on Tehran have barely put a dent in that trade, analysts said, thanks to a shadow supply chain of transshipment and a yuan-denominated payment system that bypasses the U.S. dollar.

Chinese customs have not shown any oil shipped from Iran since July 2022. Ship tracking data from analytics firm Kpler, however, indicated China's Iranian crude imports have continued to rise since then, nearly doubling to 17.8 million barrels per day (mbd) in 2024 from the 2022 level.

In the first five months of this year, those imports have remained at an elevated level of 6.8 mbd, little changed from the same period in 2024.

China is still the largest consumer of Iranian crude by far. The U.S. Energy Information Administration suggested in a report in May that nearly 90% of Iran's crude oil and condensate exports continued to flow to China.

Iran has faced some of the broadest sanctions the U.S. has imposed on any country as Washington sought to choke the regime's main source of revenue that was used to fund its nuclear program and militias such as Hamas and Hezbollah. The Trump administration has been actively imposing fresh sanctions on tankers involved in facilitating Iranian crude to China.

Nonetheless, that has put a little dent on Iranian oil exports, said Brian Leisen, global energy strategist at RBC Capital Markets, who added that "the physical market has not seen any long-term impact to the flow of Iranian oil since the [Trump] administration took office."

Iranian petroleum and petrochemical sales were estimated to have generated as much as $70 billion in 2023, according to a U.S. Congress report last year.

Foreign oil buyers are drawn to Iranian petroleum exporters because they are often sold at a discount compared to Persian Gulf or price-capped Russian suppliers.

Iranian Light oil was traded at about $6 to $7 cheaper than the United Arab Emirates Upper Zakum crude — a non-sanctioned grade and at similar quality as Iran Light — at $64 per barrel, Muyu Xu, senior oil analyst at Kpler told CNBC Thursday.

China's independent refineries, known as "teapots," have in recent years been the major buyers of cheap Iranian crude, as big private refiners and state-owned firms still shun the sanctioned crude, multiple industry analysts said.

These teapots often purchase Iranian crude on a delivered basis, meaning the sellers would arrange for carriage by sea to the place of delivery, shielding the Chinese buyers from the risk of transportation, Xu noted.

While some Iranian cargoes are shipped directly from Iran to China, the majority undergo multiple ship-to-ship transfers, often in the Middle East Gulf or the Strait of Malacca, where Iranian oil transported by sanctioned vessels is transferred to non-sanctioned tankers before shipping to China.

"[The] Middle East is a multi-origin oil market and if the cargo gets transported from ship to ship, it is not easy to trace once documents are switched," said Punit Oza, president at the Institute of Chartered Shipbrokers.

Tankers loading in Iran would also do what's called "spoofing" — where they broadcast fake tanker route information to mask their involvement in this trade, analysts said.

These payments are typically made in renminbi and through small U.S.-sanctioned banks, shielding the buyers from exposure to the U.S.-dollar dominated system, which avoids exposing China's large international banks to the risk of US sanctions.

"Because there is no dollar exposure, being excluded from the SWIFT payments systems does not pose a large impediment for oil flows to continue," said Brian. SWIFT is the world's main international payment network, dominated by the greenback.

The area to the East of Peninsula Malaysia has seen bustling ship-to-ship activity and is a "hot spot for Iranian oil," where crude oil gets transshipped onto other vessels before ending up in China, said Bridget Diakun, senior risk and compliance analyst at Lloyd's List Intelligence.

"I've seen a lot of tankers spoofing their location off Malaysia recently, with these ships taking an additional precaution to hide the ship-to-ship and obfuscate the origin of cargo," Diakun said.

As the U.S. continued to intensify sanctions, Iranian oil owners and shipping operators would take additional steps to make the supply chain "more complicated and tracking vessels more confusing" in order to carry on with these trades, Diakun added.

China's crude imports from Malaysia increased significantly last year to 1.4 million barrels per day from 1.1 million barrels per day in 2023, which exceeded Malaysia's domestic crude oil production of around 0.6 million, according to EIA.

U.S. President Donald Trump earlier this week surprised markets with a post on Truth Social that China can continue to purchase Iranian oil, in an apparent disregard of his earlier policies to squelch Iran's oil exports. U.S. crude oil prices tumbled 6% following his comment.

A senior White House official later clarified to CNBC that Trump's comments do not indicate a relaxation of U.S. sanctions.

Kpler's Xu saw Trump's remarks as a "calculated trade-off," aimed at encouraging Iran to uphold the ceasefire and re-engage in nuclear talks, while signaling "goodwill" to China ahead of the next round of trade negotiations.

"It is now too early to say whether this points to a potential waiver on Iranian sanctions," she said, noting the possibility of Washington slowing the pace of new sanctions — which would further support such purchases by Chinese teapots.

While there is still "no clear conclusion for Iran despite ceasefire, for the physical oil market, we expect oil exports to continue as usual," RBC's Brian noted.

Speaking at a news conference at the NATO summit this week, Trump said Iran is "going to need money to put that country back into shape," raising hopes that an easing of the "maximum pressure" campaign against Iran could be on the table.