Irans place in global API Group I base oil markets is proving surprisingly resilient despite last months snap-back of United States sanctions targeting the Islamic Republics oil sector. Exports continue because of Washingtons decision to grant import waivers to eight countries, allowing them time to seek alternative supply sources.
The eight countries granted waivers include China, India, South Korea and Turkey - major buyers of Irans Group I base oils. Greece, Italy, Japan and Taiwan are also included in the waiver arrangement. There are, however, worries about a looming supply crunch of Group I base stocks as the Trump administration tries to fully shut down Iranian shipments.
Irans opaque economy makes it difficult to gauge the impact of any impending reduction in supply. A trader based in the United Arab Emirates said getting detailed information about export volumes is risky and could be misinterpreted by Iranian authorities. It is tricky these days, and any opinion can be considered [a] political view and [there] will be issues, said the trader, who asked to remain anonymous.
Even so, business is ongoing but the trading environment is complicated. (It) is still happening but in lower volume and lots of difficulties when it comes to shipment and banking, the source added. Iranian refiners exported 435,000 tons of base oils during the 2017-2018 fiscal year, according to Sepahan Oil Co.
Waivers expire on May 5, raising concerns among some analysts of disruption to Group I markets as soon as the first and early second quarter of 2019. They question whether there will be a uniform decoupling from the agreement, increasingly seen as a U-turn by the Trump administration after it initially pushed for zero imports of Iranian oil products.
But there is also a practical issue - China, India, South Korea and Turkey have longstanding trade relationships with Iran, which may make cutting base stock imports hard. Nonetheless, they are likely to come under intense pressure from Washington to abide by the terms of the deal or face penalties.
Earlier this month, Iranian President Hassan Rouhani repeated a threat to halt all shipments through the strategically important Strait of Hormuz, in the event Iranian exports are disrupted. The strait is a key choke point for exports of base stocks from refiners in the Gulf and an important source of Group II and III base oils. Meanwhile, the possibility the United States may capitulate and extend waivers adds further uncertainty to Group I markets at a time of mounting plant closings as refiners switch to more highly refined Group II and III base stocks.
Tensions between the U.S. and China could also add a political dimension to compliance with the waiver arrangement. China has heavily reduced imports of U.S. base stocks amid the simmering dispute, but a recently agreed-to 90-day truce is fueling expectations the dispute may be close to a settlement.
The stakes are high for President Donald Trump because any extension to waivers raises questions over the efficacy of the U.S. decision to withdraw from the Joint Comprehensive Plan of Action, an agreement designed to limit Irans nuclear ambitions.
Irans exports continue to feed Group I markets, but an increasingly complex geopolitical outlook points to unexpected volatility as events unfold. It is also unclear whether Asian base oil refiners can fill the supply breach if Irans Group I exports are frozen, which may affect either supply or demand fundamentals.
For now prices of Iranian Group I solvent neutral 150 base oil may find support due to tighter supply of lighter-viscosity base oils, while heavier SN500 may see weaker demand but stable supply, according to ICIS. Prices of Iranian base oils came under pressure when the first round of U.S. sanctions came into effect in August, resulting in discounts to cargoes from Iran.