Base Oil Traders Fret Over Tensions


Simmering tensions between Iran and the United States are stoking fears of cargo interruptions among major base oil traders.

Insurance and ship charter costs are already spiraling, and analysts warn that a further escalation in the standoff could see critical infrastructure, such as refining assets, targeted. The increasing uncertainty threatens to undermine the Middle Easts reputation as a stable supply source, after hefty investment in new base oil capacity. Countries including China, India and South Korea have become increasingly reliant on API Group I base stocks from Iran as well as new Group II & III supply from Bahrain, Saudi Arabia and the United Arab Emirates.

Asian clients – especially China, India and Japan – should be worried at present, said Cyril Widdershoven, director at the Dutch risk consultancy VEROCY. The security situation surrounding the Persian or Arabian Gulf is under severe pressure. Base oil cargoes from the U.S. to the Middle East are also likely to be affected by rising costs and worries over mounting risk. Last year, U.S. refiners exported just under 55,000 tons of mostly Group II base stocks, to the region according to ClipperData, a company that tracks U.S. base oil exports as well as trade flows in Asia, Europe and Middle East by grade. Still, Widdershoven said disruption of critical infrastructure could be achieved without military operations since both the U.S. and Iran have strong cyber hacking capabilities.

A base oil executive in Tehran said tensions have not reached the point of hampering base oil shipments, despite the recent rise in rhetoric. Trade flows will not stop unless two things happen: first [the] U.A.E. rejects all base oil shipments knowingly from Iran and the same happens in Southeast Asia; second, which is the harshest scenario, a sea blockade by armed forces, said the executive, who spoke on condition of anonymity. The more likely outcome, the executive added, is a squeeze on profitability.

Insurance policy increases will affect competitiveness and drive refiner margins lower, and the recent jump in crude prices will also increase costs. Brent crude prices surged 8 percent after Iran downed a U.S. drone for allegedly breaching its sovereign territory.

Halting Irans base oil exports is not as straightforward as it might seem. The U.A.E. has become the epicenter for base oil re-exports within the region, often involving ship-to-ship transfers of cargoes originating from Iran. But it has come under intense pressure from Washington to cut Irans supply artery, though it is unclear if Iranian origin cargoes continue to reach the U.A.E. indirectly. Nonetheless, the threat of prosecution and a deterioration in sentiment have cut a swathe through the livelihood of regional base oil traders, particularly in the U.A.E.

Local traders have reported a steep increase in bankruptcies amid hefty price discounts by remaining base oil traders and lubricant marketers. The vicious downward spiral has been precipitated by tight credit conditions as banks wind down exposure to the sector. Confidence has been also dented among ship owners, who are increasingly risk-averse. Emarat Maritime, a shipping company based in Dubais Port Rashid, said some crews are refusing to come to the region following recent attacks on ships off the U.A.E. coast. That has led to accusations some vessel owners are seeking to profit from the uncertainty.

The Islamic Republics expertise in skirting sanctions is well-known, with evidence Iran continues to find alternative routes to maintain supply. Attention has turned to the Indian managed port of Chabahar, in Southeastern Iran. It remains the only Iranian port not subject to U.S. sanctions, acknowledged by Washington as a vital conduit to Afghanistan. But its deepwater capability could see Chabahar emerge as a transshipment hub, though analysts play down how readily Iran will be able to use the facility under the glare of sanctions.

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