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January 14, 2020

Volume 3 Issue 4

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Middle East Trade Goes on Amid Tensions

Renewed fears arose of disruption to base oil supplies from the Middle East, following the United States’ killing on Jan. 3 of Major General Qasem Soleimani, head of Iran's Revolutionary Guards' elite Quds Force, in a drone attack in Iraq.

The Middle East has become an important base oils hub that supplies 7 to 10 percent of the global market, ICIS estimates. Iran traditionally has been a significant exporter of API Group I oils, but sources say that volume is sinking under the weight of U.S. sanctions.

The spike in tensions adds further uncertainty to Group I availability from Iran, as well as nascent Group II and III supplies from Saudi Arabia and neighboring United Arab Emirates. Before the U.S. strike, Iran was increasingly routing cargoes through Iraq, labeling exports as Iraqi origin in a bid to escape U.S. sanctions targeting the Islamic Republic’s oil and petrochemical sector.

Analysts say the rising hostilities are unlikely to cause any disruption to shipments through the Strait of Hormuz, a key chokepoint for base oil exports. Still, growing unease exists among shipping companies following the attacks.

Last week, Saudi Arabia’s state-backed oil tanker company Bahri reportedly said it was temporarily suspending shipments through the strait. The move follows Brazilian refiner Petrobras’ announcement that it suspended sending tankers through the Strait of Hormuz.

“If Iran takes steps that brings shipping traffic through the waterway to a halt, it also effectively stops its own supplies,” Shashank Shekar, ICIS’ head of Middle East, said in an email.

Yet the CEO of a Tehran trading company said Iranian refiners have already shifted focus to the domestic market as well as to exporting to neighboring markets not constrained by logistics or ability to transfer funds. He warned that, although supply has tightened, refining margins may soon come under pressure for certain byproducts. “Rubber process oils [have] high sulfur for tanker fuel blending (and are in) high demand, yet no one knows what will happen after Marpol 2020 - any drop in value will heavily affect base oil refining profit margins.”

He adds that smaller cargoes, typically between 1 and 10,000 metric tons of byproducts such as rubber process oil, have been largely unaffected by sanctions and offer healthy margins.

Meanwhile, base oil markets were rattled by comments from U.S. Sen. Lindsey Graham calling for air strikes against Iran’s critical oil refining infrastructure, in the event of a further escalation in aggressions. Such a move could impact base oil production at Isfahan, Tabriz and Tehran refineries and prompt reprisal attacks from Iran on refining capacity in the Gulf. 

Despite the region’s overcapacity, the cost of exporting base oil cargoes looks set to increase amid rising insurance premiums and increasingly risk-averse shipowners. “Due to recent developments premiums for insuring vessels for war risks, perils have drastically increased, and additional premiums [are being] sought by underwriters for oil and gas related shipments,” Binesh Balan, operations manager at Dubai-based Gulf Ocean International Insurance Brokers, told Lube Report.

ICIS’ Shekar said Middle East base oil markets are facing a test that might stem any reputational damage arising from questions over the region’s reliability as a supply source. “If this region returns to normalcy from the near brink of war, then energy and commodities markets will be more assured of its maturity.” He added that such a positive outcome could limit volatility should there be further tensions.

But that outcome looks likely to benefit other Gulf refiners more than Iran. According to a base oil trader in Dubai, selling Iranian base oils has become increasingly difficult since last year, with traders reluctant to take a risk for small profits.

Iran’s aging refining infrastructure is also a factor, he added. “The [cost] threshold for Iranian base oil producers is high due to old and costly facilities. That is why they cannot cope with the extra costs of shipping and logistics and low prices of Group II and III in the market.”

Broader business sentiment has been dented as recent threats by Iran against the United Arab Emirates have unnerved already anxious local traders. Meanwhile, Iran’s major customers such as India have begun shifting to higher quality base oils, in the case of India due to the upcoming Bharat BS-VI fuel standard.

It is a grim situation, the Dubai trader added. “I think selling Iranian base oils is becoming increasingly difficult. I see better opportunities in byproducts like process oils and waxes,” the trader said.

Last week, the U.S. imposed additional sanctions on Iran, targeting the country's steel industry and eight state officials.