Saudi Arabia temporarily closed the East-West pipeline, forcing more crude exports to go through the Strait of Hormuz again—and likely bringing more supply chain constraints.

According to a report from CNBC, the pipeline was temporarily closed following multiple attacks by drones launched from Iraq. It had been used as a way for Saudi Arabia to divert crude exports from the Strait of Hormuz during the war between the U.S. and Iran. 

The damage was extensive and could possibly take months to repair, which isn’t good news in the face of dwindling oil inventories. Analysts have warned in recent weeks that global inventories and stockpiles are disappearing as a result of the Middle East conflict. 

“We’ve likely got another ~1bn to go before we hit tank bottoms, so we still have breathing
space,” said Paul Gooden, head of natural resources at investment manager Ninety One. “But every day Hormuz stays closed the oil market tightens, and the risk is asymmetrically to the upside.”

The Impacts on Auto Service

The impacts of the ongoing war in the Middle East have been felt throughout the entire auto service industry. It’s being seen on the consumer side, with Costco raising the price of 10 quarts of full synthetic oil from the mid-$30s to over $57 just after Labor Day.

Even giants like Valvoline are having to rethink their operations as prices continue to tick upwards. At the recent Goldman Sachs Global Consumer and Retail Conference, CEO, President, and Director Lori Flees and Senior VP and CFO John Willis discussed how their operations have been affected.

Willis cited the company’s strong supplier relationships as a factor helping it navigate supply chain constraints, with its supplier having even been part of the same company at one point and now being part of the Aramco family.

“The fact that they have been in the motor oil production business for so long, lubricant business for so long means that they have established networks that few in the industry can compare to,” said Willis. “And I think a misconception is that because Valvoline Global is part of Aramco, they're obligated to buy all their product from them. That's not true at all. It wasn't true before the transaction. It's not true now. They are out there finding the best product to do what needs to be done to supply their customers, of which, obviously, we are a very large one.”

Flees added that, even if the Strait of Hormuz reopened today, it would take months to return to a pre-conflict environment for trade.

The company has also seen prices rise as a result of the conflict, and expects to hit a peak of prices being 60% higher than pre-conflict by the time Q4 is over. As the company enters Q1, it will be looking at what costs its company stores will pass to the consumers, and how. The company has already taken preemptive action to mitigate any price changes, including a $5 to $7 per oil change cost impact the company has already enacted on the company side.

For franchisees, the company typically passes costs up and down on a penny basis. Due to the rapidly changing costs seen in Q3, the company has engaged its franchise partners to discuss changing its normal mode of operating.

“We normally follow the base oil index. There's a disconnect between actual cost and the base oil index based on where the spot market is and where the market overall is. And so in order to ensure we were passing costs through again on a penny basis, we needed to change that practice,” said Flees. “We've been sharing more of the forecast with them so they can incorporate it into their planning for pricing changes and/or any cost investment that they may want to delay. And that allows us to shorten that gap or that time frame.”