Israel-Iran Conflict
The recent escalation of hostilities between Iran and Israel represents far more than a distant geopolitical headline; for those in the lubricants industry, it is a direct and immediate threat to supply chain stability, cost structures, and overall profitability.
The shockwaves from this conflict are not isolated to crude oil tickers but are cascading through every link of the supply chain, from base oil refining to additive manufacturing and final delivery. For the lubricant distributor on the front lines, understanding the complex mechanics of this crisis is no longer optional—it is the essential key to managing customer relationships, protecting margins, and making the strategic pivots necessary to navigate the storm.
This analysis will dissect the immediate market shocks that have sent prices soaring, trace the powerful domino effect through the various base oil groups, and examine the compounding crisis in logistics and additives that threatens to paralyze manufacturing. Most importantly, it will provide a clear, actionable playbook for lubricant sellers to not only survive the turmoil but to strategically adapt and reinforce their market position for the volatile era that lies ahead.
The Initial Shockwave: Crude, Risk, and a Market on Edge
The first and most visible impact of the conflict was the instantaneous spike in crude oil prices. Brent crude, the global benchmark, leaped 7% to its highest price in nearly five months, while West Texas Intermediate (WTI) saw a similar surge. This jump was not driven by a confirmed loss of physical supply, but by the market’s rapid pricing-in of a “geopolitical risk premium.”
This premium is the price of uncertainty—a tax levied by the market in anticipation of what could happen. The fear of a wider conflict disrupting the flow of oil from the Middle East, particularly through the critical Strait of Hormuz chokepoint, created an immediate upward pressure on the industry’s single most important feedstock. For a lubricant business, this translates into an immediate and unpredictable inflation of the fundamental cost of all base oils.
A crucial nuance for business owners to grasp, however, is the divergence that emerged between the financial (“paper”) markets and the physical markets. While futures contracts soared, the price of physical cargoes in the Middle East rose by a more measured degree. This suggests that the physical traders and refiners who handle the actual barrels, while acutely aware of the risks, were slightly less alarmed than financial investors.
Their caution is rooted in the fact that, to date, not a single barrel of oil has actually been lost due to direct military action on commercial shipping. This creates a “wait-and-see” dynamic in the physical world, but it does little to calm the broader market volatility that ultimately sets the baseline price for everyone.
The most tangible impact has been on the logistics of moving materials. The conflict instantly elevated the risk profile of shipping in the Persian Gulf, triggering a cascade of real-world costs. Insurers immediately hiked their war risk premiums for any vessel transiting the Strait of Hormuz, a non-negotiable surcharge that is passed directly to the cargo buyer. Simultaneously, major shipping lines began implementing defensive measures, with some rerouting vessels on far longer, more expensive voyages around Africa, and others suspending operations altogether.
These delays and reroutings destroy predictable shipping schedules and add immense fuel and time costs. Compounding this is the documented increase in electronic interference and GPS jamming in the region, a direct safety threat that increases the risk of collisions and groundings, further deterring traffic. The conflict has therefore created a de facto supply constriction through these financial and logistical mechanisms, effectively reducing the availability of Middle Eastern products on the global market and creating a supply shock without a single shot being fired at a commercial tanker.
The Base Oil Domino Effect: From Group I to Group III
The initial shock to crude and shipping has triggered a powerful chain reaction down the supply chain, impacting the availability and price of the three main base oil groups. This cascading effect begins with the most vulnerable segment, API Group I, and rapidly spreads to Groups II and III through substitution and speculation.
Group I base oils are at the epicenter of this crisis due to Iran’s pivotal role as a global supplier. With an installed capacity of approximately 1 million metric tons per year and a history of exporting up to half of that volume, Iran is a cornerstone supplier for blending hubs in the UAE and key markets like India. The vulnerability of this supply is magnified by geography; nearly all of Iran’s exports must pass through the Strait of Hormuz. This direct exposure is the primary driver behind the sharp increase in Group I prices.
The disruption in the Group I market is forcing a rapid and disorderly shift across the base oil landscape. The industry has been on a long-term, gradual trajectory of replacing Group I with higher-performance Group II and III oils. The current crisis has transformed this slow-moving trend into a violent, short-term catalyst. As Group I becomes scarce and prohibitively expensive, blenders are compelled to execute an immediate, unplanned substitution, reformulating their products with the next available alternative: Group II.
This sudden demand shift is creating a significant supply shock in the Group II market, which is now caught in a pincer movement. The cost of Group II is rising due to higher crude oil feedstock prices, while simultaneously being pushed up by a massive demand spike from former Group I users. This is compounded by the fact that several major Group II facilities have been undergoing planned maintenance, further tightening availability just as demand surges.
The impact on the premium Group III market is driven less by fundamental substitution and more by market psychology and speculative behavior. The conflict has injected extreme uncertainty into this inherently tighter market. In response, traders and distributors holding Group III inventory are reportedly withholding it from the market, anticipating that panicked buyers will eventually pay even higher prices. This speculative hoarding creates an artificial scarcity that is disconnected from actual production. The market is now conditioned by recent shocks—the pandemic, the war in Ukraine, major plant fires—where holding inventory was rewarded. Traders are now quick to hoard stock at the first sign of trouble, confident that buyers with no buffer will pay a premium. This dynamic reveals a systemic fragility in the high-end lubricant market: it is structured for just-in-time efficiency, not resilience.
The Compounding Crisis and the Onset of Manufacturing Paralysis
The challenges extend far beyond base oils. The conflict is creating a compounding crisis that affects the entire ecosystem required to produce a finished lubricant. A business’s final cost of goods is not merely the price of base oil; it is the sum of base oil, additives, packaging, inbound freight, production overhead, and outbound freight. The current conflict is driving up multiple of these cost centers at once, creating a “cost cascade” that threatens to paralyze manufacturing.
The lubricant additive supply chain is just as vulnerable as the base oil market. Finished lubricants are typically composed of 5-25% chemical additives, and without this critical portion, production halts. The war in Ukraine provided a stark lesson when Western additive companies withdrew from Russia, leaving the Russian lubricant industry dependent on a single Chinese supplier. The current conflict presents a new threat, as the Middle East is a key transit point for the raw materials used to make these additives. Any disruption can bring blending operations to a standstill, regardless of base oil availability.
This confluence of pressures means the lubricant seller is hit by a wave of simultaneous cost pressures from all sides. Absorbing them is often not commercially viable, forcing the seller to pass on a larger, more complex price increase to customers—one that is much harder to justify than a simple increase tied to oil prices. This is the choice facing businesses today: absorb crippling costs, or risk paralyzing production by being unable to secure materials at a workable price.
Place an Order Now, or Wait?
Given the extreme volatility and upward price pressure, every lubricant buyer faces the same critical question: do I lock in supply now at a high price, or do I wait, hoping for the market to cool down? This is the central dilemma of the crisis, and the decision carries significant risk either way.
The Case for Placing an Order Now
The argument for immediate action is rooted in risk mitigation. The primary driver is the threat of further escalation. If the conflict widens, the current “geopolitical risk premium” will seem small in comparison to the price spikes that would follow a genuine, large-scale disruption to shipping in the Strait of Hormuz. Securing supply today, even at inflated prices, acts as an insurance policy against a far worse scenario tomorrow.
Furthermore, the logistical situation is deteriorating. War risk insurance premiums and freight rates are not static; they are likely to continue climbing as long as tensions remain high. An order placed now has a better chance of being processed and shipped before these costs become even more prohibitive. Most critically, the fundamental supply-and-demand picture is tightening across all base oil groups. Group I is directly threatened, Group II is being squeezed by substitution demand, and Group III is being hoarded. Waiting does not just risk paying a higher price; it risks a complete stock-out, leading to the ultimate cost of manufacturing paralysis and having nothing to sell. In a seller’s market, securing a contract locks in availability, which has become more valuable than price.
The Case for Waiting
Conversely, the argument for waiting is based on avoiding the classic mistake of buying at the peak of a panic. The current prices are inflated by fear and speculation as much as by fundamentals. If diplomacy leads to de-escalation, this risk premium could evaporate quickly, leading to a sharp price correction. Buyers who loaded up on inventory at the top of the market would be left with high-cost stock while their more patient competitors purchase cheaper materials, severely damaging their margins.
Waiting also allows for more information to emerge. A pure “wait-and-see” approach, while risky, allows a business to better gauge the true state of physical supply versus perceived risk. It provides time to see how demand destruction from high prices might balance the market and to observe the actions of major suppliers and competitors. For a business with sufficient existing inventory, a brief pause can feel like the most prudent financial decision.
The Verdict: Strategic Procurement is the Only Answer While both arguments have merit, a passive “wait-and-see” approach is the most dangerous path. The risk of supply disappearing entirely outweighs the risk of overpaying in the short term. The cost of having no product to sell is infinitely higher than the cost of holding inventory that has declined in value.
Therefore, the optimal strategy is not to simply “buy now” or “wait,” but to engage in active, strategic procurement. This involves a multi-pronged approach:
- Secure Immediate Needs: Cover your short-term operational requirements immediately. Purchase enough material to guarantee you can service your customers for the next 30-60 days, accepting the current high prices as a necessary cost of doing business and ensuring continuity.
- Stagger Future Orders: For medium-term needs, work with suppliers to place staggered orders. This averages out your purchase price over time, protecting you from buying everything at the absolute peak of the market.
- Prioritize Supply Over Price: Shift the negotiation focus with suppliers from haggling over the last dollar to securing firm commitments on volume and delivery dates. In this market, a guaranteed cargo is worth more than a potential discount.
- Accelerate Diversification: Do not wait to find alternative suppliers. The process of qualifying new base oils and additives must begin now to build resilience into your supply chain for the months ahead.
Ultimately, the goal is to avoid paralysis. Waiting for the market to return to a pre-conflict “normal” is a fantasy. The landscape has changed. Decisive action to secure supply, even at a painful cost, is the only rational response to protect your business from the catastrophic risk of having nothing to produce or sell.
