Base oils markets find unique pricing dynamics by region

HOUSTON (ICIS)–Global base oils markets face regionally unique pricing dynamics but largely stagnant underlying demand and sufficient supply amid still challenging macroeconomic conditions. Crude oil price volatility and its effect on refining economics will be a key driver going forward this year.

• Tighter European spot availability of Group I
• Ample supply, demand weakness drives unprecedented low Group III in US
• Chinese prices weaken versus import
• US Group II fills regional supply gaps in Middle East, Asia during H1

ASIA
Tight supply of Group II will likely be alleviated to some extent in May and June.

Significant volume upwards of 10,000 tonnes of US-origin Group II lots comprising 70N, 110N, 220N and 600N grades landed on Indian shores in the first-half of April, and a second shipment of a similar size was also heard to have arrived in India in late April.

The below graph compares CFR 150N India prices with FOB Asia NE and FOB USG export prices for the same grade.

This is likely to more than offset the reduced supply of South Korean and Taiwanese cargoes, especially that of heavy grade 500/600N, in recent months.

Demand for South Korea-origin Group II cargoes was relatively strong in April in regions such as India and the UAE, while demand in other parts of Asia such as China and southeast Asia was subdued.

May to June is typically a lull season for base oils from the key downstream lubricants sector.

ICIS analysts forecast Asia Group II prices to dip slightly in May before recovering in June.

As for Group I, spot availability of southeast Asian material continued to be in short supply, with sporadic offers of Thai-origin brightstock cargoes heard.

With few alternatives of Group I imports from other sources such as Europe or the Middle East, the tight supply situation is expected to persist in the coming months.

CHINA
Most downstream lubricant producers in China are expected to maintain steady purchasing pace in May, and the unusual weakness in March and April trade sentiment may sustain, too.

Trades were far weaker than expected in these two months, the traditional peak demand season for base oil.

Group II price gains in Asia were noticeable through March and April, compared with small increases in China.

Such a price divergence is expected to widen in May partly as Asian refiners may further hike their export prices in view of expected supply shortage caused by robust demand in southeast Asia.

However, slow growth in China’s real economy such as the automobile and industrial sectors may lead to flat buying demand for lubricant oils, hence domestic lubricant oils producers may continue to buy base oils on a need-to basis, according to many producers.

The average import costs of contractual Group II base oils are expected to be higher than their sale prices in China during April, said key importers, citing increasing export prices from Asian refiners and depreciating Chinese yuan against the US dollar.

This, combined with ample supply of domestic Group II materials amid limited routine maintenance, may cause significant price spreads between domestic and imported Group II base oils.

Therefore, downstream producers are expected to cut the usage of imported cargoes. The lubricant oil producers and importers in China may have little import interest as a result.

US
Group II and Group III prices have diverged, with Group II spot rising on tighter availability following a slew of exports in Q1 and two price increases this spring up to 55 cents/gal on 100N.

The price increases were implemented on the back of higher costs for crude and VGO and affected term contract customers to a greater degree, but spot prices have been pressured upward in tandem to a lesser extent.

The availability issue may be temporary as it is due to unconfirmed work by one refiner, other refiners being sold out and production of Group III cutting into Group II yields.

Group III suppliers have not raised prices in 2024. Rather SK Enmove’s 4cSt posted price is down by 50 cents/gal over two separate decreases this year. Separately, Motiva has reduced its 4cSt posted price by a cumulative 65 cents/gal.

ICIS spot 4cSt has fallen by 15%, while spot 100N has risen by 8.2%.

The US 4cSt price decline has been unprecedented, bringing US Group III lower than Asia.

The graph shows the US 4cSt price as it compares with the Asia 4cSt price and the US 100N price.

US EIA data show:

• Production up 5.5% YTD compared to 2023
• Consumption down 29.5% YTD compared to 2023 (-27.2% in January and -32.2% in February)

Demand data are worse than 2023 so far this year, which explains the heavy export months of Q1 and potentially why Group II supplies are more balanced domestically in early May.

ICIS analysts forecast a general downtrend to flat pricing for the remainder of the year.

EUROPE
European domestic Group I base oils spot supply limitations, a key driver of spot price increases in the last month, are expected to continue in May and early June.

SN150 remains the tightest grade, closely followed by SN500. Domestic brighstock supply is balanced, contrasting with the export market, where shortages drove price hikes from March through April.

In the European export market, availability is likely to remain limited through the rest of Q2.

Players are expected to continue prioritising domestic supply, and very few offers are anticipated for the export market.

Brightstock is expected to be tight for export now that Eni has stopped production at Livorno.

A limited number of producers offer brightstock in sufficient volumes for export requirements, and the removal of Eni from the market means there will be significantly less availability.

While lower demand at the beginning of Q2 offset the limited availability, buying interest looks set to increase further into the quarter and as a result there could be supply shortages.

Buying interest has been increasing from west Africa, north Africa and east Africa in early May, and this is likely to continue throughout Q2. Demand from west Africa will then drop off in Q3 amid rainy season.

ICIS analysts forecast European Group I prices to rise through August.

MIDDLE EAST
Group II remains oversupplied in the UAE following bulk arrival of volumes from Asia and the US in late April and H1 May, and the trend is likely to persist into late May and early June.

Import volumes from the US and northeast Asia upwards of a combined volume 25,000 tonnes of 110N, 150N, 220N and 500N/600N have dampened fresh imports’ interest from Asia.

The recent firmness in offers and selling indications for northeast Asian 150N and 500N/600N exports have thus resulted in weak response from regional importers.

The UAE market in the Middle East continues to rely on sourcing low viscosity index (VI) Group I base oils from Iran in the absence of spot high VI availability from Asia, Europe and from within the region.

Spot Group I supply from Asia and from within the region is likely to remain curtailed as major producers in these markets opt to focus on contractual commitments.

This is expected to sustain demand and prices for Group I Iranian product in the near term.

The Eid ul Adha holidays in mid-June may temper imports’ and ex-tank offtake in H2 June before recovering in July.

ANALYSTS’ VIEW
With ICIS crude forecast currently expecting crude to hover around the $90/barrel mark for most of the remainder of the year, this could keep some pressure on base oils pricing.

With VGO, while slightly elevated vs typical spreads with crude, gas oil and fuel oil, moving broadly in line with crude, higher crude prices flow through to lower base oils margins for producers.

We have seen European prices rise on the recent crude rise, where cash margins are close to their sustainable minimum, while other regions have held stable. Upward pressure may come in Asia where gas oil price rises over the summer might have the most significant effect on the base oil market, resulting in upward pressure there due to competition from fuels producing units.

In the US, where margins are highest currently, there is expectation of a flat to declining market on sufficient length in supply.

Base oils are used to produce finished lubricants and greases for automobiles and other machinery.

Focus article by Amanda Hay, Eashani Chavda, Samantha Wright, Matthew Chong, Whitney Shi, Veena Pathare and Michael Connolly