TheTanker War Redux
The “on-again, off-again” United States-Iran war, characterized by bursts of intense military strikes followed by brief ceasefires and failed negotiations, has often been compared to the 1980s Iran-Iraq war, which featured a similarly long, repetitive, and intermittent conflict focused on striking commercial shipping vessels and oil infrastructure in the Persian Gulf, known as “the Tanker War.”
Aside from Iran effectively blocking the Strait of Hormuz by mining the waters and launching drone and missile attacks on commercial ships, Iran-backed Houthi rebels are controlling the Bab al-Mandab Strait by attacking vessels loading crude oil and refined products in the Red Sea. Massive tankers are now forced to bypass the Middle East altogether and sail around Africa’s Cape of Good Hope, causing severe global supply chain delays, skyrocketing insurance premiums, and adding pressure to already steep energy prices.
But aside from all the consequences of the Iran war on global crude oil, refined products and other markets, it is the Tanker War, or the impossibility of shipping base oils out of the Persian Gulf that is causing the most headaches for the base oils and lubricants industry.
At the time of writing, the Iran conflict remained unresolved, and very few vessels were allowed to cross the Strait of Hormuz. Base oil production in Bahrain, Qatar and Abu Dhabi — the main hubs of API Group III production in the Middle East — was expected to remain shut down until vessel traffic through Hormuz can resume safely. Availability from the gulf thus remained effectively cut off, taking approximately 25% of total global Group III base oil production capacity out of the market.
The official distributor of Adnoc material in the U.S. was compelled to declare force majeure on contract commitments in late July as it was unable to resume shipments from the plant in Abu Dhabi. Other suppliers maintained strict sales controls and allocations. Asian and Canadian imports of Group III base oils, along with domestic supplies were not deemed sufficient to meet demand, and as a result, some blenders were unable to supply finished products that require base oils with specific approvals.
With the most dramatic effects of the supply disruptions in the Middle East felt by the Group III segment, it was not surprising to see prices of base oils in this category surge. In the U.S., suppliers implemented $0.50 to $1.00 per gallon posted price increases in August and early September, reflecting the extreme scarcity of product.
A further tightening of the Group III 4 centiStoke grade was expected in Europe as producers Repsol-SK Enmove experienced unplanned production issues at their joint venture Iberian Lube Base Oils Co. plant in Spain that affected the 4 cSt line. While these supplies are not typically for the U.S. market, European product shortages exacerbate the global supply picture.
But the Group III segment was not the only one affected by the Middle East crisis. Very tight conditions also reigned in the Group I and Group II segments, exerting upward pressure on prices and prompting several producers to increase postings. Some cuts saw more limited supply than others, with Group I bright stock and Group II 220N mentioned as the least available grades.
Most producers were striving to fully meet contract commitments and did not have much extra product to offer for spot deals because they preferred to hold on to any additional barrels to cover potential production disruptions during hurricane season. Most tropical storms occur in the August-September timeframe.
U.S. participants were keeping an eye on global base oil supply levels, as disruptions in other regions may impact production and availability moving forward. There were still concerns that Group I and Group II supplies may tighten further if attacks on Saudi refineries and vessels by Houthi rebels continue, as these might prevent Luberef — a Saudi Aramco subsidiary — from loading crude oil and Group I and Group II base oil cargoes from its ports on the Red Sea. Luberef was originally planning to start a shutdown at its Yanbu, Saudi Arabia, plant in August, but the refiner has reportedly postponed it to October.
In the U.S., Paulsboro planned to take its Group I plant in New Jersey off line for a five-week turnaround in September and was not expected to have spot availability until close to the end of the year. Petro-Canada has also scheduled a 30-day turnaround on its Group II unit in Mississauga, Canada, in the third quarter that may be tightening supplies further.
Naphthenic base oil prices continued to be exposed to upward pressure due to firm crude oil and diesel values. There was also an atypical price gap between naphthenic and paraffinic grades, with many consumers seeking pale oils to replace paraffinic cuts in some applications as prices were more competitive. This was incentivizing suppliers to consider naphthenic price adjustments.
While production disruptions and plant turnarounds may impact base oil supplies over the next few months, refinery economics may also affect base oil production rates. Refiners may be reducing base oil output to maximize diesel production, spurred on by high profit margins and low domestic supplies. Diesel and gasoline prices have been trading close to record premiums over crude oil. International diesel availability remains severely limited by trade sanctions on Russian energy exports and disruptions caused by Ukraine drone attacks on Russian refining units, terminals and energy hubs.
Gabriela Wheeler is base oil editor for Lubes’n’Greases. Contact her at Gabriela@LubesnGreases.com