31 December 2010 11:24 [Source: ICIS news]
By James Mills
LONDON (ICIS)--A tight market for Group I base oils in ?xml:namespace>
The clouded forecast follows a year when market trends defied most expectations. Global demand has recovered rapidly from the 2008-09 recession and prices have climbed to levels that allow producers significant margins over the cost of vacuum gasoil feedstock.
Market observers are still trying to piece together a coherent view of the 2010 market before making predictions for 2011. Many are asking why the European market has been so tight in the second half of this year.
One possible explanation is that European refineries have been operating at low rates because of poor margins on motor fuels and other high-volume oil products.
This would reduce the volume of vacuum gasoil feedstock for base oil production and ultimately tighten the market.
Despite wide margins on base oil production, base oils are insignificant in the total volume output of a typical refinery.
Demand for motor fuels is a key unknown in forecasting 2011 base oil supply in
Increased demand might also explain the current tightness, but most European economic indicators, including industrial production and vehicle manufacturing, have suggested only a modest recovery from the lows of 2009.
In addition, Europe is importing greater volumes of Group II and III base oils from the
Exports might account for a tighter European market, and there are signs that
A change in the way base oils are taxed there has been proposed, and this has the potential to alter base oil consumption significantly. This factor alone adds great uncertainty to the European outlook for 2011.
There is much more agreement on the medium-term outlook than on the market’s immediate course.
Global consumption of base oils is not expected to grow significantly in the next five years. Steven Ames, of SBA Consulting, told delegates at several ICIS base oils conferences this year that global demand in 2015 would only exceed that of 2007 in the most optimistic scenario.
One factor moderating growth in demand for base oils is that new technology is giving motor oils a longer life. Longer drain intervals - the length of time between oil changes - have been made possible by developments in engine and lubrication technologies and have reduced the volume of base oils consumed in vehicles.
More engine oil is also being recycled, especially in
Amy Claxton, of My Energy, expects base oil production capacity to remain constant in the period 2010-2015. New Group III capacity coming on stream in the Middle East and
New Group II/III capacity is also being planned in
Whether or not the medium-term outlook will encourage Group I refiners in
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