Qatar Blockade Stokes Base Oil Worries

DUBAI, United Arab Emirates – The crisis that arose this month between Qatar and several of its neighbors is fueling unease over base oil supplies from the Middle East, amid fears the row could escalate and disrupt shipments. On June 5, Saudi Arabia, the United Arab Emirates, Egypt and Bahrain cut diplomatic relations with Qatar, accusing the wealthy Gulf state of funding terrorism and supporting extremist Islamist groups.

But it is the simultaneous severing of air, sea and land links that has implications for international and regional base oil supplies. Doha has signaled it will use ports in neighboring Oman to bypass the blockade after the UAE barred Qatari-flagged vessels and vessels destined for or arriving from Qatar berthing at its ports. Uncertainty over the duration of the dispute and the possibility other countries, including Turkey, Iran and Russia, will be sucked into the crisis is casting a shadow over the Middle East as a base oil supply source.

Photo courtesy of Katie Kellenberger

Egypt, Saudi Arabia, Bahrain and the United Arab Emirates have all cut diplomatic ties with Qatar.

Oil giant Shell has invested billions of dollars in the massive Pearl gas-to-liquids plant at Ras Laffan, a joint venture with Qatar Petroleum, and Shell supplies base oils produced at the plant to a global network. Analysts say the blockade will be a major concern for Shell after the plant was temporarily shut down for unscheduled maintenance. However, Shell is downplaying the fallout from the Gulf spat.

Nureddin Wefati, head of media relations for the Middle East and North Africa at Shell EP International, said in an interview, Currently, we are focused on running our Qatar business as usual and are not experiencing any operational disruption as a result of the current situation. We have no further comment at this time.

Stefan Mueller, principal senior analyst at IHS Chemical consultants, said there is little doubt Shell will be worried by recent developments. I would guess Shell is on high alert. The API Group III supply from Pearl is vital for its global lube business. Any interruption would mean they struggle to meet contracts and sales goals as they cannot get Group III from other sources.

International companies look particularly exposed, given the Gulfs complex matrix of energy assets, amid mounting speculation trade sanctions may be imposed on firms that do business with Qatar. Unsurprisingly, the sharp rise in tensions has led to calls from both the United States and the United Kingdom for Gulf States to ease restrictions.

Bahrain, Saudi Arabia and the UAE have become major suppliers of Group II/III base oils. While there is no current indication supplies from these sources will be interrupted, a dramatic intensification in the standoff could radically alter supply and price dynamics. For the moment, there has been little impact on prices, although that could be due to seasonality, according to Muhamad Fadhil, head of Middle East markets for ICIS, a market information provider.

Base oil prices in the Middle East are relatively stable since early June as market players digest the implications of this diplomatic crisis in the Gulf. Ramadan is typically a lull season, and buyers stock cargoes ahead of the fasting month, limiting any supply-side impact, he said.

But even in the absence of the dispute worsening, perceptions about base oil supplies from the Gulf may change. However, any repercussions are likely to be temporary, Fadhil argued. The Gulf will remain a reliable source of base oils for international customers. This blockade may lead to logistical delays of several days due to rerouting of shipments, which will largely impact procurement and supply chain timelines.