Vessels began transiting the Strait of Hormuz in mid-June on a tentative U.S.-Iran peace deal, and crude futures exhaled, returning oil prices to pre-conflict levels.
Crude reacts swiftly to geopolitical optimism, but supply chains do not. Skirmishes remain possible in the coming weeks as the deal takes hold, said Ajay Parmar, director of energy and refining at Independent Commodity Intelligence Services, known as ICIS.
“In our estimated recovery timeline, we are accounting for this possibility and the delays this may cause to the recovery. Overall, we see crude, oil products and petrochemicals markets only properly recovering early next year,” Parmar said.
For Group III base oil, the key ingredient in passenger car motor oil, the reality is the market will be undersupplied through 2027 and potentially beyond. ICIS had been estimating a 27 percent Group III supply reduction in 2026 and 7 percent in 2027 if the strait reopened in June.
Damage Is Done
The Middle East accounts for 35 percent of global Group III supply among the Bahrain Petroleum Co., Abu Dhabi National Oil Co. and Shell’s Pearl Gas-to-Liquids facility in Qatar, according to the ICIS supply and demand database. The Pearl facility is the largest single Group III production site in the world, at 2 million tons per year. It accounts for 73 percent of the region’s production.
Last year, the Middle East accounted for 46 percent of total U.S. base oil imports. Most base oil imported into the U.S. is Group III. The U.S. takes the largest share of Pearl exports, at 30 percent. Hormuz reopening theoretically allows trapped supply to flow again, but the vital waterway remains a geopolitical football that risk-averse companies may want to avoid. Most critically, the world needs full restoration of Pearl production lost to military strikes for the market to move meaningfully back toward pre-conflict levels.
The U.S. is uniquely exposed as its only alternative is South Korean production, which accounted for 30 percent of U.S. imports in 2025. South Korean refiners cannot fill the gap left by Pearl, nor can they easily ramp up because of heavy reliance on Middle East crude. North
America has the largest Group III supply deficit and will continue to, even as new U.S.-based production comes to market. Group III prices have nearly tripled illustrating how critical the Pearl facility is to the passenger car motor oil market.
The value chain is absorbing price shock at an unprecedented pace, even as demand climbs to levels last seen in 2022. The supply shock is not easily addressed, still may be partially obscured by inventories, and likely will hit hardest in the U.S., as global inventories will not last through market recovery.
Automaker Requirements
When Group III is disrupted, passenger car motor oil manufacturers feel the effects most acutely. Most automakers require 0W-20 fully synthetic motor oil for their newer vehicles in the U.S. The fully synthetic market has rigorous requirements that can make it difficult for a lubricant blender to switch to a different base oil. Passenger car motor oil is about 80 International, a lubricant market intelligence provider, estimates that a third of all passenger car motor oil used in the U.S. is 0W-20. Automaker approvals carry steep costs and heavy time investments. Not all Group III base oil has such approvals.
SK Enmove of South Korea is the leading Group III producer with the most approvals and an extensive history with additive companies. Other Group III producers have gained approvals, including Shell, which led to Pearl’s large presence in North America.
Formulators cannot simply swap one producer’s base oil for another. The American Petroleum Institute has granted emergency provisional licensing in the wake of the conflict and Pearl’s disruption, but manufacturers still must show that the substituted material achieves the same performance.
Group III is also used in other applications: automatic transmission fluids, heavy-duty engine oils and specialty applications.
Passenger car motor oil and heavy-duty engine oils combined represent about half of all base oil demand. Availability will likely be a problem, but it will not be widespread, and the price of an oil change will certainly be higher. Petroleum Trends International suggests a typical oil change may cost $15 to $25 more, while quick lube discounts may be more uncertain and choice more limited.
Demand At Multiyear Highs
U.S. Energy Information Administration data shows domestic U.S. demand in March reached its highest level since 2022, which suggests consumers are responding to the prospect of tight supply. This indicates that the market may be returning to “just-in-case” procurement given the uncertainty around price and future availability. “Just-in-time” procurement dominated from 2023-25 amid inflationary pressures and high interest rates. As a result of lean inventory management, exports outpaced domestic demand for much of the last three years.
Source: Automotive News