Middle East fighting impacts the basic oil market! Chevron Corporation (CVX.US), Motiva urgently limits supply.

With the ongoing disruptions in the global crude oil market due to the Middle East conflict, two key suppliers of high-end engine oil have reduced the delivery volumes of certain products to the minimum levels allowed by contracts. According to sources, Chevron Corporation (CVX.US) and Motiva Enterprises, a subsidiary of Saudi Aramco, have allocated minimum contract delivery volumes for three grades (Group III) and two grades (Group II) of base oils to multiple customers. Base oil contracts typically set three delivery volume tiers for suppliers - high, medium, and low. Sources say that, apart from occasional refinery shutdowns, they had rarely seen delivery volumes reduced to the minimum levels previously. Base oils are essential raw materials in the production of various lubricants, widely used in automotive, industrial, aviation, and marine industries. Gabriella Twining, Director of Base Oils Pricing at independent energy and commodity price assessment agency Argus Media, said: "Base oils, as the name suggests, are the foundation of all finished lubricants. Lubrication is needed as long as equipment is running, and lubricants are made from base oils." She added, "If no new supplies come in, stocks may hit bottom in a month. Car owners may delay oil changes, but costs will be higher, and product availability will further decrease." The current supply crisis mainly focuses on Group III base oils - a medium-refined base oil used in conjunction with Group IV base oils to produce high-performance engine oils for supercars and luxurious vehicles. Currently, global production of Group III base oils is primarily carried out by three refineries in Qatar, the UAE, and Bahrain. The Qatari refinery has been shut down since March this year due to damage; while the other two are still operational, their exports are hampered by the unstable situation in ports in the Strait of Hormuz due to the conflict in the Middle East, causing disruptions in exports. According to Argus Media data, prices for Group III base oils have now risen to record highs. South Korean refineries were once considered a 'Plan B' for the production of Group III base oils, but these facilities have recently switched to producing fuel raw materials to cope with the difficulties in obtaining crude oil from the Middle East. The last alternative is to use lower-refined Group II base oils, but these resources are currently being heavily used for diesel production to alleviate fuel shortages. Around 44% of the Group III base oils in the US rely on imports from the Middle East. One of the main sources is the Pearl GTL plant in Qatar, operated by Shell (SHEL.US), which was damaged in an Iranian attack in March this year. Sources indicate that it will take at least a year for the Group III base oil market to recover, which matches Shell's previous estimate of the time needed to repair some facilities of the Pearl plant. Holly Alfano, CEO of the Independent Lubricant Manufacturers Association (ILMA), pointed out that the factors mentioned are putting pressure on nearly three quarters of the US's Group III base oil imports from the Middle East, while also stripping the industry of the ability to substitute with Group II base oils. She also warned that the upcoming hurricane season could further impact the supply. If a storm hits the Gulf Coast, it could disrupt 30-40% of the US's Group II base oil production capacity and an additional 10% of the Group III base oil production capacity, exacerbating an already tense supply chain. End consumers have already started feeling the impact. The head of Costa Oil, a quick repair chain with over 200 stores, recently revealed on social media that Mobil and Shell have notified Costco and Walmart Inc. that they will be unable to provide packaged lubricants in the short term, and supermarket oil shelves are expected to have shortages in the coming weeks. ILMA estimates that Group III base oil stocks in the Middle East may run out by June 2026. Given that the US heavily relies on this region for imports and has limited alternative paths, the industry's buffer space is extremely limited. Analysts suggest that without substantial easing of tensions in the Middle East conflict, this global supply issue may not be resolved by 2027. In this context, maintenance costs for high-performance vehicles may significantly increase, and there may even be difficulties in scheduling appointments and finding oil available for changes. Regarding the situation in the Middle East, it was reported that US President Trump convened a meeting with the National Security team on the evening of May 18 to review military action plans against Iran. This meeting took place hours after Trump ordered military strikes against Iran to be halted as planned for May 19. According to two US officials, the meeting focused on the next steps in the conflict with Iran, progress in diplomatic negotiations, and possible military actions the US might take. The briefing reportedly showed that Trump is "seriously considering a return to military action against Iran." According to sources, some individuals advocating for a tough stance against Iran believe that Trump currently has the sentiment to "make a strong blow, forcing Iran to make concessions in negotiations." It is reported that the latest feedback from Iran's negotiation proposal "has not shown significant progress", while regional mediators are trying to urge Iran to put forward more flexible proposals in response to US demands on the nuclear issue. On May 19, Vice President Pence stated at a White House briefing that the US has made "great progress" in establishing communication channels and advancing the diplomatic process with Iran, but the US is also prepared with a "Plan B" to restart military action. At the same time, he refused to disclose specific details of the current backstage negotiations. In addition, a senior NATO official said that if the Strait of Hormuz does not reopen by early July, NATO will consider whether to "assist ships" through the waterway. The proposal has reportedly received support from multiple NATO member countries but has not yet obtained unanimous support. The senior NATO official said that while some NATO countries still oppose authorizing joint NATO actions in the strait, if the blockade continues, they will eventually support the proposal.