OUTLOOK ’15: Asia base oil market seen soft on low crude, supply

By Jasmine Khoo

SINGAPORE (ICIS)–Asia’s base oils market is poised to remain stable-to-soft for the first quarter of 2015, especially for the Group II sector as a result of steep decline in upstream crude values and supply overhang of Group II grade, market participants said.

Lacklustre demand seen from key markets such as China because of slowing economic growth have also contributed to the pessimism plaguing the near term outlook for the Asia base oils market.

Increasing competition from deep sea cargoes is another factor that would play a part in capping upward price movement of Asia base oils, the sources added.

On the other hand, regional refiners were engaged in stiff competition during this period of bearish market conditions, leading some market players to regard it as another factor contributing to the downward spiral of base oils spot prices.

The upcoming Group II facilities in the Middle East in the first quarter of 2015 are expected to add to the supply glut, which would likely weigh on the movement of northeast Asian Group II cargoes to the Middle East.

Most market players also expect further downward pressure on Group II pricing, as increasing sellers’ inventory build up brought about by slower sales are prompting northeast Asian Group II suppliers to lower offers further to attract buying interest among customers.

The second half of 2014 saw hefty falls in Group II spot prices, brought about primarily by slides in the upstream crude prices which coincided with the start-up period of new Group II facilities in both the US and northeast Asia.

According to ICIS data, spot prices for Group II’s high viscosity grade 500N dipped from an average of 1,037.50/tonne FOB (free on board) NE (northeast) Asia on 6 June to $745/tonne FOB NE Asia on 28 November, reflecting a decrease of around 28%.

With steep declines in spot pricing observed globally, new arbitrage patterns emerged, as widened price gaps between various regions made deep-sea trade increasingly viable and profitable for some traders.

Amidst an existing supply overhang of Group I and II base oils, the Asian market is expected to face stiffer competition going forward when deep-sea cargoes of the US, Europe and Middle Eastern origins make their way into Asia with competitive pricing.

Some market players were confident of restocking activities among regional importers in January and February ahead of the Lunar New Year holidays in Asia, but others held on to opposing views.

“Buying activity is traditionally expected to pick up before Lunar New Year, but with the current weak market conditions, I find it hard to believe that the base oils market will show significant improvement within the next two months,” a northeast Asia-based buyer said.

“Most buyers are still trying to keep inventories lean to stem losses from the existing material on hand,” the buyer added.

Meanwhile, another southeast Asia-based blender, who uses base oils as a feedstock for lubricants production, echoed similar sentiments about demand.

“The downstream lubricants market is showing limited signs of improvement…it is unlikely that we will see better demand in the next quarter. In fact, the lubricants demand has been weak since the start of this year, compared with previous years,” the blender said.

However, most market sources said that the broad direction in which base oils spot prices will move in the next quarter still depends heavily on upstream crude and gas oil prices.

“Ultimately, we would have to see how crude decides to behave over the course of the next four months,” a southeast Asia-based trader said.

“It will be hard to expect base oils [prices] to recover immediately as it is more downstream, so I personally feel it would take around six to eight months to see significant recovery.”

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections