OUTLOOK ’16: Europe Group I base oil refinery closures to change market

By Ross Yeo

LONDON (ICIS)–The European base oil market in 2016 will be defined, at least in the first half of the year, by two refinery closures in northwest Europe that were scheduled to take place at the end of 2015.

Kuwait Petroleum has sold its Europoort refinery in Rotterdam to Gunvor, which will have ceased operating the site’s base oil, wax and bitumen production by the end of December 2015. The refinery has a base oil capacity of 235,000 tonnes/year.

Shell will have also closed the base oil unit at its Pernis refinery, also in the Netherlands, which has a capacity of 370,000 tonnes/year, at the same time.

While the Shell closure has been known since April 2014, the sale of Kuwait Petroleum’s refinery and the news of the base oil closure was only announced at the beginning of the fourth quarter of 2015.

The late notice means customers have had less time to arrange alternative supplies for 2016, and so the disruption to the market will be greater.

Indeed, the impact was already seen in the closing stages of 2015 in the complete absence of the usual end-of-year price drop. Normally, many market players try to end the New Year with low working capital and so reduce their demand or offer bigger discounts on sales, and the result is that prices fall.

Yet in 2015, the uncertainty over supply in the early stages of 2016 prevented this from happening. Either consumers had already sought out new suppliers, meaning any excess supply needed to be retained for the additional demand in 2016, or players with spare volumes decided to hold on to them in expectation of tightness to come.

Conversely, some sources have also suggested that in the early stages of 2016 there could actually be an oversupply, albeit a brief one, as Shell and Kuwait Petroleum look to offload their last remaining volumes.

As the year unfolds, however, there will be a sizable chunk of supply missing that needs to be replaced.  

Firstly, increased imports of Group II base oils from the US will arrive, with a portion of the existing Group I demand in Europe expected to switch over. The switch from Group I to Group II has long been happening at a gradual pace, and the closures have merely served to accelerate that process.

Secondly, the volume of Group I imports from Russia will increase, with Russian producers looking set to capitalise on the closures in northwest Europe.

One producer said that while Europe looks to expand and develop Group II and Group III capacities, Russian producers can satisfy customers with Group I product and therefore expects its sales to remain robust in 2016.

Another source said that European blenders will be key customers in 2016 as they are likely to pay a substantially higher price for base oils than the regular buyers in the Baltic.

Although supply in the Baltic Sea export market improved towards the end of 2015, sources said that producers have sold a lot of inventory for December and even a portion for January and that the year could get off to a tight start as a result.

In addition, buying interest is expected to be healthy as buyers look to replenish stocks following efforts to maintain low inventories ahead of year end.

Demand in the Baltic Sea export market has remained healthy despite the approach of year end, with sources suggesting there is little excess product in the market.

With the Russian New Year holiday lasting until mid-January, market players are under pressure to secure volumes now as if they do not, they will have difficulty procuring product until the second half of the month.

Lower crude oil prices are not expected to have any immediate effect on base oil values, although some suggest that it could exert some downward pressure in the coming months.

One source said that base oil values are already at their lowest possible level and that as a result, it saw no influence from lower upstream costs.

Elsewhere, other sources believed stability on the pricing of heavier grades was likely in the New Year as they were in less plentiful supply than lighter grades.

There was potential for downward pressure on SN150 values according to one source, which said that lower demand and healthier supply for this product amid lower crude oils made its pricing outlook more bearish than for heavier grades.

Quiet conditions are likely in the Black Sea base oils export market at the start of the year as Turkish players look to renew their import licences.

Additional reporting by Sarah Trinder