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The U.S. Withdraws from Iran Nuclear Deal – Impact on Base Oil

Price increases are not unusual in the lubricants business. In fact, we typically see two to three a year. In most cases the increases are somewhat predictable since they are often driven by changes in the price of crude oil and its impact on base oil prices. This is logical since crude oil is the feed for base oil and base oil accounts for about 75 to 99% of the volume of material in finished lubricants and roughly 50 to nearly 100% of its cost. The balance of the cost of goods belongs to performance additives, which are also impacted by higher base oil prices.

Understanding the impact base oil costs have on the lubricant prices, it’s import to consider how today’s announcement that the U.S. will withdraw from the 2015 Iran nuclear deal can impact crude, and therefore lubricant prices.

Specific to the U.S. withdrawing from the Iran deal, President Trump said, “We will be instituting the highest level of economic sanction,” and that “Any nation that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States.” Although the action is clear, the reactions are not, and therein lies the uncertainty about how this will effect the price of crude.

Considering that Iran is OPEC’s third-largest oil producer and exports close to 2.5 million barrels of crude a day, one obvious scenario is that the sanctions will result in tightening the supply of crude in a global supply and demand pool that is fairly balanced. Such tightening would push crude prices higher and consequently, drive base oil and lubricant prices up. There is, however, a good deal of uncertainty around this scenario. Most uncertain is how Iran, US allies, other countries and the markets will react to the actions taken today.

Of particular interest are reactions to the statement made by Treasury Secretary Steven Mnuchin following the U.S. withdrawing from the deal, saying “Sanctions will be reimposed subject to certain 90 day and 180 day wind-down periods. At the conclusion of the wind-down periods, the applicable sanctions will come back into full effect.” This statement sends a clear message that there is time for all involved to absorb and assess how the withdraw and sanctions could impact their interests and how they will react to them.

You can be sure all those in the lubricants business will be keeping a close eye on how this one plays out. But in the meantime, you can also be sure the industry is thinking hard about base oil price increases they have already seen this year and how they have effected margins.

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