OUTLOOK ’11: Base oil demand to recover, supply remains in flux

31 December 2010 20:00  [Source: ICIS news]

The Texas City refinery complexBy Heather Doyle

HOUSTON (ICIS)--Global base oil demand bottomed in 2009, improved consistently each month in 2010 and will mostly recover by the end of 2011, but supply conditions remain in flux, according to industry experts.

Demand in 2009 was "the lowest in more than 25 years, maybe even 40”, said Stephen Ames, managing director of SBA Consulting. “2010 demand should regain two-thirds of the 2008/2009 loss mainly due to large inventory restocking and robust demand from China and India.”

Next  year could indeed rebound from the losses of late 2008/2009 largely because of improved demand from an improved economy, as well as the growth rate of lubricants in China, a US base oil supplier said.

In 2009, total US base oil output fell 12% year on year, reaching 55.4m bbl, according to the Energy Information Administration (EIA). The total output for 2009 was the lowest since 1993.

The EIA has released 2010 production figures through September, which showed increased production addressing the improved demand.

Naphthenic production through September has been 7.8m bbl, 22% higher than the 6.4m bbl produced during the same time in 2009. Contributing to the naphthenic growth, aromatic extracts in rubber process oils have been replaced by naphthenic base stocks or treated distillate aromatic extracts (TDAE).

Paraffinic production through September was 36.9m bbl, up 11% from 33.2m bbl at the same time last year.

While base oil demand was expected to recover in 2011, Ames said that overall growth to 2015 could be limited by machinery and lubricant advancements as well as emissions legislation.

Longer drain intervals and fill-for-life applications are having an increasingly greater impact in North America and Asia. A 10% increase in engine oil drain intervals reduces demand by 2m tonnes/year, according to industry analysts.

Heavy-duty equipment is being made to run at higher loads and have closer tolerances, meaning less lubricant is needed.

Higher emission standards combined with improved lubricant technology continue to drive demand away from Group I base oils and over to Group II and III base oils.

The ongoing move away from Group I base oils will continue to impact supply.

At least 500,000 tonnes of Group I production is expected to be removed from the market as refiners either close down old facilities or upgrade to Group II/III production. This will have the greatest impact on brightstock and paraffin wax supply.

“Brightstock and paraffin wax are selling for just as much as Group III base oils and can only be produced at a Group I plant,” said Amy Claxton, owner of My Energy, a US consultancy that covers lubricants, waxes and gas to liquids (GTL).

Meanwhile, an additional 9m tonnes/year of premium base oil capacity was expected to come on stream by 2015, including 3.7m tonnes/year of Group II and 4.8m tonnes/year of Group III or GTL.

“The migration to Group II base oil–based, heavy-duty motor oil formulations is driven by the general transition to tighter automotive specifications, but also availability of the Group II base stocks by region,” said Brent Lok, a global marketing manager for base oils with Chevron.

The US is the largest supplier of Group II base oils. Group III base oils are mostly produced in Asia.

When it comes to pricing, buyers and sellers said that postings in 2011 may be influenced more by supply and demand fundamentals than by feedstock costs.

Six major industry-wide paraffinic base oil price increases took place in 2010, with the last one in December bringing Motiva’s price for Group II 600 viscosity to $3.41/gal, 38% higher than the $2.47/gal price at the start of the year.

Five major industry-wide paraffinic base oil price changes took place in 2009. In 2008, players took in double that in price changes, pencilling in at least 10 adjustments before 2009 began.

Even as demand improved in 2010, supply constraints for the base oil market were an ongoing issue.

Reduced fuels demand earlier this year equated to low operating rates and less feedstock vacuum gas oil (VGO) availability for base oil production, said Gerry Jackson, of global base oil distributor Renkert.

As long as fuels demand was weak in the US, refiners would generate less VGO feedstock, leading to reduced base oil production.

Just as fuels demand improved, a series of production issues pushed many US sellers to issue sales allocations, Jackson said.

Holly, American Refining, Chevron and Motiva issued sales allocations during the year.

Both Group II sellers Motiva and ConocoPhillips will be in planned maintenance turnarounds during the first quarter, which will limit supply further at the start of 2011.

From a demand standpoint, base oils will largely recover in 2011 before growing again in 2012 but supply conditions remain fragile and ever-changing.

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By: Heather McGuire Doyle
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