Base oils: Price trends wait for crude’s lead

Global base oil prices plummeted in the later months of 2014 and into 2015, as the crude oil price fall took its toll. But what lies in store for 2015 is still very uncertain

Base oil prices have come down a long way since the most recent peak levels enjoyed at the end of the second quarter of 2011. European spot Group I SN 150 FOB prices, for example, have slipped from a peak of $1,500/tonne in mid-2011 to rest at just $800/tonne.

The story is similar across all regions. True, prices had largely stabilised through 2013, but the sharp collapse in crude oil prices midway through 2014 had the inevitable effect of sending base oil prices plunging, as illustrated in the accompanying charts.

In Europe, demand was disappointing throughout 2014, both on an underlying basis and with respect to Group I, with blenders increasingly moving toward formulations using Group II and Group III instead.

Poor underlying demand for lubricants is linked to the ailing European economy, and as such prospects for a significant improvement next year are not high.

For Asia, the 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 the steep decline in upstream crude values and supply overhang of Group II grade.

LACKLUSTRE CHINA

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.

 In the Chinese market itself, prices of the main Group II N150 grade in east China declined by about 20% in 2014, to $1,186/tonne, according to ICIS C1 data. China is expected to face a severe oversupply of Group II base oils this year on the back of heavy domestic and overseas capacity expansions, say industry sources.

A total of 1.49m tonnes/year of capacity from five new plants will come on stream in China this year and boost the country’s Group II base oils capacity by a third to 2.61m tonnes/year, according to ICIS data. Set against the backdrop of lacklustre demand, prices of the material may have to fall further.

In the US, tumbling upstream prices for crude oil and vacuum gas oil (VGO) were setting the pace for base oil prices going into 2015. Plummeting base oil prices followed the dramatic drop in West Texas Intermediate (WTI) crude oil, with refiners also losing ground on base oil feedstock VGO premiums.

The direction of crude oil prices will be a key determinant of base oil price movements this year. But that direction remains very uncertain as we enter February.