North America
North America’s lubricant industry began 2026 like any other year. Soft demand conditions and seasonal price fluctuations had characterized much of the previous two years. Just two months in, it would face a supply crisis that eclipsed COVID in 2022 and the financial crash in 2008.
On Feb. 28, Military the United States and Israel attacked Iran, which replied swiftly by attacking energy infrastructure around the Gulf and blocking passage through the Strait of Hormuz, one of the world’s energy choke points. This sharply curtailed supplies of API Group III base oils from the Middle East, exposed North America’s reliance on imported base stocks, particularly for synthetic and low-viscosity engine oils, and set prices for Group I and II, as well as Group III, soaring ever higher.
The Middle East accounted for about 20% of global Group III production and supplied approximately 47% of U.S. Group III imports in 2025. The closure of the Strait of Hormuz stranded shipments and disrupted production and exports from the region. Damage to Shell’s Pearl gas-to-liquids plant in Qatar further reduced the availability of premium base oils. South Korea, another important supplier to North America, could not fully compensate for the shortfall, while higher feedstock and logistics costs added to the pressure on international supply chains.
The effects spread beyond Group III. U.S. base oil prices rose sharply as buyers competed for available volumes, suppliers tightened allocations and spot availability diminished. Group II producers also faced pressure as blenders sought alternatives to scarce Group III grades. However, substitution was not straightforward: changing a base oil formulation can affect performance, OEM approvals and compliance with engine oil licensing requirements. In March 2026, the Independent Lubricant Manufacturers Association asked the American Petroleum Institute to provide emergency flexibility under its Engine Oil Licensing and Certification System. API subsequently activated its Emergency Provisional Licensing program, allowing eligible licensees limited flexibility in the use of alternative Group III base oils, although it did not provide blanket permission to substitute Group II for Group III.
Pricing became increasingly disconnected from the more familiar relationship between crude oil costs and base oil values. Although crude prices fluctuated considerably during the conflict, availability and replacement costs became the dominant considerations for many buyers. By July, Argus reported record-high U.S. base oil prices across all groups, with particularly severe increases for Group III. Blenders attempted to pass higher input costs on to lubricant customers but faced resistance from buyers concerned about volatile crude prices and the risk of paying elevated prices just before a potential market correction. Suppliers also restricted some customers to contractual minimum volumes, contributing to tighter availability of full-synthetic, 0W and dexos-approved engine oils.
By October 2026, the disruption remained a defining feature of the market. Limited shipping through Hormuz, reduced Middle Eastern output and the slow recovery of affected supply chains continued to constrain premium base oil availability. Alternative production in Asia offered some relief but could not fully replace the lost volumes. North American producers were also limited in their ability to increase output quickly enough to close the gap. Chevron’s planned Group III unit in Pascagoula, Mississippi, was expected to begin production in late 2026, while ExxonMobil’s new 400,000 -ton-per-year Group III plant in Baytown, Texas, was scheduled to start in 2028. These projects should strengthen domestic supply over time, but they cannot immediately resolve the shortfall.
The crisis has also highlighted the vulnerability of lubricant manufacturers to concentrated sources of supply and the limited scope for reformulating products without affecting approvals. While the market had previously been shaped by a long-term shift from Group I toward higher-quality Group II and Group III base oils, the 2026 disruption made availability, supply security and formulation flexibility more immediate concerns. The outlook for the remainder of 2026 and into 2027 will depend on the restoration of Middle Eastern production and shipping, the ability of alternative suppliers to increase exports and the pace at which new North American capacity becomes operational.
Asia
Asian base oil markets faced the same supply shock as North America, but it reversed the more comfortable supply conditions that had characterized parts of 2025, when seasonal demand weakness, growing inventories and new capacity had weighed on spot prices. The effects were particularly severe in API Group III, as buyers sought alternatives to Middle Eastern base stocks and competition intensified for available volumes from Asian producers.
The impact varied across the region. China, South Korea, India and Japan have substantial domestic refining capacity, allowing them to maintain production and, in some cases, increase exports to markets traditionally supplied by the Middle East. However, the region’s own dependence on Middle Eastern crude and other feedstocks, together with higher freight and insurance costs, complicated the response. Singapore also faced production constraints, limiting the availability of some regional export volumes. The disruption to shipping through the Strait of Hormuz and other maritime routes further increased transportation costs and uncertainty over delivery schedules.
Group III experienced the greatest price pressure as Middle Eastern supply became difficult to access. South Korean, Chinese and Indian producers emerged as important alternative suppliers, although additional exports could not fully compensate for the missing volumes. Demand from North America and Europe also diverted Asian material away from regional buyers, tightening availability in Asia itself. By the end of August, imports of premium-grade base oils from the Middle East had fallen sharply, dropping to less than 1,000 metric tons, compared with nearly 15,000 tons in July and typical monthly volumes exceeding 64,000 tons during the first five months of the year.
The price increases extended beyond Group III as higher replacement costs, freight charges and competition for available material affected the wider market. South Korean lubricant base oil export prices rose sharply during 2026, while refiners benefited from wider margins between base oil selling prices and feedstock costs. For lubricant manufacturers, however, higher input costs created pressure to raise finished lubricant prices and manage working capital. The availability of suitable grades became as important as their price, particularly for manufacturers using approved formulations that could not easily accommodate alternative base stocks.
By the third quarter, seasonal demand weakness offered some relief, but the underlying supply balance remained tight. The summer slowdown reduced immediate buying requirements, while stronger exports from China, India and South Korea helped replace some lost Middle Eastern volumes. Nevertheless, Asian base oil exports to the United States and Europe reduced the surplus available within the region just as demand was expected to recover toward the end of the third quarter. Maintenance at Asian Group III plants added to the pressure.
The outlook for the remainder of 2026 and into 2027 will depend on the restoration of Middle Eastern production and exports, the reliability of shipping through the Strait of Hormuz and the ability of alternative suppliers to maintain output. Even if shipping conditions improve, damaged infrastructure, production constraints and disrupted trade flows could delay a return to normal supply levels. Asia’s large refining base provides a degree of resilience, but the crisis has exposed the limits of regional spare capacity and the risks associated with dependence on a concentrated group of premium-grade suppliers. For buyers, supply diversification, inventory management and formulation flexibility are likely to remain priorities even if prices retreat from their crisis highs.
Europe
While North America and Asia were dealing with Hormuz, European markets also has Russia’s continuing war against Ukraine to contend with.
Both affected trade flows and supply security but by different mechanisms. The war in Ukraine continued to influence sanctions, energy policy and the movement of Russian-origin petroleum products, while the Middle East crisis directly constrained supplies of base oils, particularly API Group III, from a region on which Europe relies heavily.
The Middle East disruption initially sent buyers scrambling for replacement volumes as cargoes were delayed or stranded and suppliers withdrew offers amid uncertainty over availability and freight costs. European Group II and Group III markets came under pressure in March, when producers and traders struggled to confirm deliveries. The shortfall deepened during the summer as reduced imports coincided with maintenance at major European Group III plants, including Neste’s Porvoo refinery in Finland and Iberian Lube Base Oils Company’s Cartagena facility in Spain. By August, European Group III supply had fallen to approximately 80,000 metric tons, its lowest level in six years, while the premium over Group II exceeded $1,400 per ton. October arrivals from Asia and the Middle East, together with recovering Spanish production, offered some relief, although supply remained vulnerable to further disruptions.
Group I markets also experienced renewed tightness after the Middle East crisis disrupted supplies and raised replacement costs. Europe’s declining domestic Group I capacity has left the region increasingly dependent on imports, making it more exposed to changes in availability and freight rates. Higher prices encouraged some lubricant manufacturers to reconsider their sourcing strategies and formulations, accelerating interest in re-refined base oils. By September, European buyers were showing greater interest in locally sourced re-refined grades as an alternative to scarce virgin material. Although RRBO capacity remains smaller than that of conventional base oils, the crisis has strengthened the case for circular feedstocks and diversified supply chains.
The war in Ukraine continued to shape European trade through sanctions and efforts to prevent Russian petroleum products from entering the market through third countries. The European Union extended its economic sanctions against Russia until July 2027 and adopted further measures in July 2026. An import prohibition on petroleum products refined from Russian crude in third countries also took effect on Jan. 21, 2026, subject to specified exemptions. These restrictions increased the compliance burden for European importers and traders, particularly when establishing the origin of feedstocks and the ownership and activities of suppliers. The distinction between Russian-origin base oils and products manufactured elsewhere using Russian crude is therefore important when assessing both market flows and sanctions exposure.
At the same time, the Middle East crisis complicated the European pricing outlook. Higher energy, freight and insurance costs raised the cost of obtaining replacement material, while uncertainty over delivery schedules encouraged buyers to secure supplies where possible. Group III prices rose much more sharply than those of Groups I and II, widening the premium for higher-performance base stocks. However, elevated prices and economic uncertainty also restrained consumption, limiting the extent to which higher input costs could be passed on to lubricant customers. The result was a market in which supply availability and grade-specific pricing increasingly diverged from the direction of crude oil prices alone.
By October, the arrival of additional cargoes and the easing of some refinery maintenance constraints had improved Group III availability, but had not eliminated the underlying shortfall. The outlook for the remainder of the year and into 2027 will depend on the restoration of Middle Eastern production and shipping, the reliability of Asian exports and the pace of recovery at European refineries. Meanwhile, the continuing war in Ukraine and evolving sanctions requirements will remain important considerations for European trade. The combined effect of these developments is likely to reinforce the importance of diversified sourcing, local re-refining and careful supplier due diligence in a region where structural declines in Group I capacity have already increased dependence on imported base oils.