DUBAI, United Arab Emirates- Irans API Group I base oil exports face renewed pressure as the United States lobbies key allies to cease all imports of Iranian oil ahead of a Nov. 4 deadline for U.S. sanctions to be reinstated.
Analysts say the escalation in rhetoric is fueling unease over regional base oil shipments as U.S. President Donald Trump ratchets up pressure on the Islamic Republic. Trade discussions and actual cargoes are believed to still be moving, yet the market remains cautious, and uncertainty is the keyword, said Izham Ahmad, markets editor at ICIS. The increase in tensions comes amid domestic civil unrest and a 40 percent fall in the value of the rial following the U.S. decision to quit the 2015 Joint Comprehensive Plan of Action, a deal brokered between the U.S. and five major powers to limit Irans nuclear ambitions.
Under the previous round of sanctions, some buyers of Iranian oil were granted waivers, and Iran maintained shipments of Group I base oils to major buyers such as China, India and Turkey. But the U.S. has warned that no exemptions will be granted when sanctions snap-back. However, Washington recently walked back the statement, saying waivers may be considered on a case-by-case basis adding further ambiguity in the market. Although sanctions are yet to take effect, the base oil impact on business is already being felt. According to Mehrdad Vajedi, director of United Arab Emirates-based manufacturer and trading company Permian Energy, domestic lubricant demand in the automotive and industrial sectors has fallen sharply.
Imports of base oils are at risk if international companies stop trading with Iran when sanctions on its automotive and aviation sector come into effect on Aug. 6. (The) other problem is sourcing higher quality base oils – Iran needs 30,000 to 35,000 metric tons of higher API (specification) base oils in the coming months, Vajedi said. Iran is the Middle Easts largest auto market. Still, President Trumps desire to completely halt Iranian oil exports may be impractical and difficult to enforce. ICIS Ahmad said tracking shipments to a major base oil importer like India, the worlds third-largest lubricant market, would be a logistical challenge.
Iran does not typically export base oils cargoes directly to India; they have been using a transshipment route via the U.A.E. It has always been difficult to track exactly how much volume of Iranian exports arrives in India regularly, Ahmad said. Last year, India imported more than 2.5 million tons of base oils, according to Petrosil, and buyers are monitoring events, said Shailendra Gokhale managing partner of Rosefield DAA International Consultancy. Most industry players have decided to wait and watch as clarity is yet to emerge on trading with Iran. India has not responded to U.S. demands, although any cut in its sizeable imports would be a blow to Irans fragile export market. Additionally, China is unlikely to comply with U.S. demands in the midst of a bitter trade battle with Washington.
The stand-off also stands to jeopardize shipments of API Group II and Group III base oil exports from the Middle East Gulf. During a recent trip to Switzerland, Iranian President Hassan Rouhani gave the strongest warning yet that Iran would respond to any attempt to halt exports. The Americans have claimed they want to completely stop Irans oil exports. They dont understand the meaning of this statement because it has no meaning for Iranian oil not to be exported while the regions oil is exported. But a complete blockade of the strategically important Strait of Hormuz would be difficult to achieve, analysts say.
Barring any physical disruption to shipments from the Middle East, regional Group II and III base oil producers in the U.A.E. and Saudi Arabia could likely fill the void created by a cut in Iranian exports. Nonetheless, even the threat of an interruption to supplies could cause a spike in insurance rates and impact base oil prices.
Still, Irans base oil exports may yet continue after it revived plans to barter oil for goods, a scheme previously used to skirt sanctions. Permians Vajedi says he expects Iranian base oils to be traded under this scenario in the coming months. Iran has also said it may allow the private sector to export oil by buying it through the Tehran bourse to counter U.S. sanctions.
Meanwhile, Europe is working to stave off a complete collapse in the Joint Comprehensive Plan of Action by petitioning Washington to grant waivers for European companies that have signed multibillion dollar deals with Iran in the energy, automotive and aviation sectors.