Perhaps more than other regions, base oil supply in Europe and the Middle East has been severely constrained since the end of 2020. Industry insiders say the flow is unlikely to increase in the first half of this year.
Like much of the world, both regions are battling the effects of the pandemic-induced drop in fuels demand and slashed refinery run rates, which have cut back the flow of vacuum gas oil feedstock for base oils, Samantha Wright, ICIS’ senior editor manager for export European base oils, reminded attendees at the ICIS World Base Oils & Lubricants Live event in mid-February. But these two regions have faced additional challenges that continue to restrict availability.
Europe
By the second week of January, many European marketers were sold out of API Group I, and some had even sold out for February. At the end of that month, domestic prices in Europe had reached levels seen just before the pandemic, reported Eashani Chavda, markets editor for base oil sales within Europe.
“Although Europe is facing another round in the coronavirus pandemic and national lockdowns, this has had a limited impact on demand,” she commented.
“There might be more material available in March, but it will be a minimal improvement if anything,” predicted Wright.
In fact, increasing pressure from export markets has driven many exporters to purchase base stocks from the domestic market in order to satisfy global demand. “Overall, the European market is extremely tight with high demand, and this is expected to continue in the coming months,” said Chavda.
Demand has been particularly high in the United Kingdom, which should carry on through most of the second quarter this year. So far, Brexit has had very little impact on the base oil market, as players had stockpiled Group I oils in anticipation of the country’s separation from the European Union.
Group I is likely to remain tight through the second quarter in both domestic and export markets, Wright said, especially if the automotive sector sees the 20% output boost that’s expected, creating demand for industrial oils.
For Group II, tight supply this quarter have been driven not only by changes in demand but also shortages of imports from the United States, where severe weather in the summer curtailed production. “This had a knock-on effect to the European market, and we are still facing the impact of that today, as trade flows have massively changed since the start of last year,” Chavda observed.
U.S. imports have resumed, but not nearly enough to satisfy current demand. Further, large volumes were diverted to Asia, where buyers will pay higher prices.
With continued tightness for Group II, the European base oil imports quota is unlikely to be exceeded in the first half of this year.
Group III prices have continued to climb since the start of the year. “The market is reaching a critical level of scarcity for all grades, although 6 centiStoke remains the most problematic this month [February],” Chavda said. Reduced jet fuel production, which has led to the Group III shortage, is expected to continue over the first half of the year as long as travel is down due to the pandemic.
Upcoming maintenance will complicate the Group III picture, including a major turnaround at Neste’s 5,100 barrel-per-day plant in Porvoo, Finland, during the second quarter and at SK’s 26,000 b/d plant in Ulsan, South Korea, beginning in March, Wright pointed out.
Group I supply won’t escape downtime, either. Maintenance is scheduled for Repsol’s 2,500 b/d plant in Cartagena, Spain, during this quarter; Gazpromneft’s 5,000 b/d plant in Omsk, Russia, between February and May; the 5,100 b/d Lotos plant in Gdansk, Poland, in March; Total’s 4,800 b/d plant in Gonfreville, France, through April; and PKN Orlen Oil’s 3,100 b/d plant in Plock, Poland, from April to May. The Galp refinery in Porto, Portugal, also has maintenance scheduled, though Wright did not specify when.
Middle East
In the Middle East Group I has been precious and at the end of 2020 hit the highest prices since August 2018, senior editor Izham Ahmed said during another presentation.
Base oil from Iran was sold over the past few months through sales tenders, he said, but only in small volumes of 2,000-7,000 metric tons. Buyers from Asia also bid for the cargoes, increasing competition.
Shutdowns and lower production rates during the pandemic resulted in backlogs for contract obligations, causing lower spot availability. Sanctions on Iranian exports, combined with higher domestic demand in that country, also tightened supply.
Prices for Group I solvent neutral 150 were particularly strong in the fourth quarter last year. Export prices from Sharjah, United Arab Emirates, gained 24% from October to December, Ahmed reported.
He also noted that Iranian Group I prices typically rise ahead of the Nowruz holiday, which is on March 21 this year.
Although many blenders in the Middle East still only use Group I, consumption of those grades will continue to decline through 2022, shrinking about 1.2%, ICIS predicts.
Bulk imports of Group II into the U.A.E. have slowed considerably, Ahmed noted. Spot imports from Northeast Asia have “essentially ground to a halt over the last few months,” and alternate sources such as the U.S. have also been absent. Some flexitank cargoes have been traded, “but these have been merely a trickle compared to 2019 levels.”
Group III prices have also risen in the U.A.E. to the highest since ICIS began tracking them in August 2019.
Ahmed noted that Abu Dhabi National Oil Co. has reclassified its base oils as Group III+ products, which are likely to command a higher price. But demand for Group III in the region will not increase significantly in next few years, he said, so domestic production will continue to be exported.