Iran is being forced to discount its already cheap crude even more as a top ally gains a bigger foothold in the key Chinese market.

China has become an important destination for Russian oil as Moscow seeks to maintain flows following the fallout from its invasion of Ukraine. That's led to increased competition with Iran in one of the few remaining markets for its crude shipments, which have been significantly curtailed by US sanctions.

Russian exports to China surged to a record in May, with the OPEC+ producer overtaking Saudi Arabia as the top supplier to the world's biggest importer. While Iran has cut its oil prices to remain competitive in the Chinese market, it's still maintaining robust flows, likely in part due to rising demand as China eases strict virus restrictions that had crushed consumption.

"The only competition between Iranian and Russian barrels may end up being in China, which would work entirely to Beijing's advantage," Vandana Hari, founder of Vanda Insights in Singapore, said. "This is also likely to make the Persian Gulf producers uneasy, seeing their prized markets taken over by heavily discounted crude," she added.

The Iran nuclear deal is likely to resume following US President Joe Biden's visit to the region.

Iranian oil has been priced at nearly $10 a barrel below Brent futures that are scheduled to arrive in China during August. That compares with a discount of about $4 to $5 prior to the invasion. Iran's Light and Heavy grades are most comparable to Urals.

In general, the overall bullish trend in the oil market is still strong:

China's independent refiners are major buyers of Russian and Iranian oil. Cheap supplies are important because they are constrained by fuel export regulations, unlike state-owned refiners, which are not given quotas to supply fuel to foreign markets, where prices have risen because of supply shortages. Instead, they supply the domestic market and have suffered refining losses in recent months as quarantine due to Covid-19 has undermined demand.

Less-sulphurous and higher-quality Russian ESPO crude from the eastern port of Kozmino is more expensive than Iranian oil, according to traders. However, it is still cheaper than comparable barrels from the Middle East. China's willingness to take discounted oil despite its origin is curbing flows from other suppliers.