Base Oils Through the Tough Years
In what will be my last column for Lubes’n’Greases magazine—I’ll still be writing for Lube Report—I considered that I should reflect on the past couple of years from a base oil perspective.
First, along came the COVID-19 pandemic, followed by an unforeseen war in Ukraine. The effects of these events have been enormous globally. A snowball effect has arisen from the war, with vows being made to Ukraine in its defense against the Russian military by many allied nations around the world. Even those countries that had shown early leanings toward Putin and Russia have now gone cooler. China and India are among those that have now retreated from support for the invasion.
How have these events shaped the base oil and lubricants industry? COVID is still hanging around and affecting the movement of people and the transportation of goods and services as well as inciting a global economic nightmare that has been exacerbated by the most perfect of storms.
Economies were impacted by lockdowns and various government restrictions imposed during the height of the pandemic. Then energy markets were thrown into disarray following the Russian invasion, with Europe and others having been largely reliant on Russian exports of oil and gas to balance a dwindling European refinery production slate.
Perhaps the “fortunate” aspect was that the invasion has so far taken place during the warmer months of the year. But with a cold winter approaching, stocks of oil and gas are in a critical supply balance across Europe. Energy increases have led to increasing prices for almost all commodities and shortages of basic food items, such as grain and vegetable oils. This has led to staggering inflation on prices and now on wages in Europe and across the world. Borrowing costs for governments and individuals have rocketed. With no end in sight to hostilities in Ukraine, the future looks bleak.
What occurred in base oil markets during this time? One primary effect was the EU ban on all Russian hydrocarbon imports, a notion shared immediately by the U.S. and other likeminded allied nations. Russian exports of base oils emanating from traders and distributors based in the Baltic ports have all but disappeared, with limited quantities of base stocks only moving to deep-sea locations where there are currently no sanctions on Russian products.
At the same time, several European refineries initiated major turnarounds. With Group I being the major base oil type coming out of Europe’s refineries, the market suddenly ran short of these grades, causing hikes in numbers at a time when prices were already moving upward due to rising crude and feedstock prices.
The ENI refinery in Livorno lost production of Group I base stocks for almost eight months. This refinery was an important producer and supplier to both domestic and export markets. Prices for Group I rose further until they were higher than offers for Group II and Group III base oils. Group II and Group III base oils were not too long in catching up with Group l increases. While the Group I market was being driven by a dearth of availability, demand remained buoyant for the other markets.
Toward the end of the summer, most refinery turnarounds were completed and production had restarted at Group I facilities around Europe. This heralded the return of the European export market, which had been missing due to the lack of availability of Group I. With greater availability and declining crude levels, Group I prices started to contract. With greater availability came falling demand. Due to the economic situation across the globe, finished lubricant sales faltered as well as base oils and additives. This is still the case today, and some producers that trimmed base oil run rates are still holding large swathes of unwanted inventory.
During October and November, Group II and Group III started to suffer the same malaise, with demand falling off in the main markets. Refining margins for base oil started to reduce, while margins for distillates and diesel surged, incentivizing refiners to increase fuels output and optimizing base oil production.
The prices for all base oil groups slumped from their peaks, notably Group I. Values attached to Group I grades were almost 50% lower than they were in early summer, reinforcing the squeeze on refinery margins. Unfortunately for producers, crude and feedstock values remained high, stoking the dilemma for cutting prices to move material out of tank while maintaining satisfactory margins.
While Group II had survived the initial downward spiral on prices, in early November it was clear that the high prices achieved on these products could not be sustained. Group III prices also started to weaken, although demand for these grades remained positive as new formulations for automotive lubes coming on stream during the latter part of 2022 require the use of Group III grades.
The current dire global financial and economic problems affecting almost all countries are set to remain until inflation is controlled across a basket of major nations. Steps are being taken by governments to address and stem this situation, but many of the solutions may be in the control of individual states.
The ending of hostilities in Ukraine would go a long way to bring back trade and commerce. As we approach 2023, things can only get better.
Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in London, U.K. Send him comments or topic suggestions at pumacrown@email.com