U.S. Pull-out Clouds Outlook for Iranian Oils

DUBAI, United Arab Emirates – Shipments of API Group I base oils from Iran face disruption following United States President Donald Trump’s decision to pull out of the 2015 agreement for Iran to rollback its nuclear program as fears of a trade blockade increase.
Analysts say the move may stoke regional tensions amid uncertainty how the crisis will unfold. “Risk has increased as has the oil price – the real question is what is Trump going to do against nations who still stand behind the treaty,” said Stefan Mueller, associate director, research and analysis at IHS Markit.
Iran reasserted itself as an important source of Group I base oils in the global supply chain after sanctions were eased under the Joint Comprehensive Plan of Action, a deal brokered between the U.S., Germany, France, the United Kingdom, China and Russia in 2015. The Islamic Republic resumed shipments to Europe and bolstered supplies to other major Group I base oil markets including India and China.
It also began importing Group II and III base oils as the domestic Iranian automotive market edged towards higher specification multigrade lubricants – a move widely believed to benefit new Group II and III supply from Gulf Cooperation Council countries.
Although Iran’s base oil exports look set to be curtailed, it is still possible dealings will continue at least in the short term, according to one Tehran based trader. “I personally believe [the] base oil business has the potential to use other currencies than the U.S. dollar for transactions.” Still there is little doubt the market is reeling from the decision. “Customers are psychologically aroused and agitated,” the trader added.
Traders were caught off-guard by the U.S. Unconfirmed reports say buyers of Iranian base stocks began cancelling orders in the immediate run-up to Mr. Trump’s decision. Mehrdad Vajedi director of the U.A.E.-based manufacturer and trading company Permian Energydiscounts the speculation, and believes other markets will easily absorb Iran’s Group I base oils.
“We will see Chinese, Russian and Indian traders buy,” Vajedi said. “I see less role for U.A.E. traders due to pressure from the U.A.E. and Iran, so products probably will land directly in Asia and Africa.” The immediate fallout is also tempered by a 90 to 180 wind-down period before a full snap-back of U.S. sanctions, suggesting the full impact on base oil markets may not be felt for some time.
A dearth of Iranian Group I supply could speed the use of Group II and III base oils in key markets like India, a long-standing consumer of Iranian base oils. “With India moving towards [Bharat Stage IV automobile emissions standard] in 2017 and BS VI by April 2020, India’s preference of base oils would be more Group II and Group III, so my guess is Iranian base oil imports would come down irrespective of whether there are sanctions or not,” said Shailendra V.Gokhale, managing partner of Rosefield DAA International Consultancy in Mumbai.
Gauging how much Iranian base oil export volumes will be hit is difficult, but Richard Robinson of Ashburton Global Energy Fund said a worst-case scenario involving strict policing of sanctions could see as much as 700,000 barrels per day of Iranian crude removed from the market. In the absence of a commitment by other signatories to safeguard the Joint Comprehensive Plan of Action, shipments from Iran may also be difficult to insure, analysts said.
The Middle East is now an established base oils and finished lubricants hub, but growing concerns the standoff might interrupt shipments from the wider region look set to increase market volatility, particularly if Iran suddenly exits the nuclear accord.