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Base oils-Lubes: Market overview
Updated to Q3 2018
Planned maintenance at Group I base oils units in Asia was limited for the third quarter, leading some market players to hold on to expectations of largely stable supply conditions. Producers have also not announced any plans for changes to run rates in the near term.
Demand is likely to remain weak in the third quarter because of bearish market sentiment, following a slowdown in cargo uptake in the second quarter. Earlier declines in Group I spot prices seen in the second quarter are poised to weigh on buying appetite among regional importers and traders.
Group II base oils spot cargo supply is expected to fall in the third quarter as a major Group II refiner based in Taiwan will conduct scheduled maintenance in July. As a result, 70N, 150N and 500N base oils supply could potentially come under pressure in the near term.
Cargo uptake among regional Group II users is expected be largely unchanged amid the lack of market factors which could potentially drive demand. Some buyers said they were able to address their downstream production needs with existing term contract volumes, which meant that spot procurement could be subdued.
Group III base oils supply in the Asian region will likely be unchanged in the third quarter due to expected stable production activity, with no planned maintenance at regional units. Middle East-origin Group III lots are also likely to remain available in the near future to Asian buyers.
Ample availability of Middle East cargoes in the Chinese market due to robust procurement seen in the second quarter is likely to curtail cargo uptake in the third quarter. Many buyers held on to ample stocks, which led most of them to adopt a need-to basis attitude towards purchases going forward.
Supply in the third quarter will remain steady, with the summer traditionally a quieter demand period. Any pressure on supply should be eased as buying interest will be seasonally quieter. One refiner in southern Europe is said to be preparing for scheduled maintenance in September, with spot volumes from this player restricted as a result.
Demand for Group I base oils in Europe during the third quarter is likely to decrease as the summer period tends to be seasonally quieter because players are absent from the market. Buying interest is expected to pick up when players return to the market in September though.
European Group II base oils supply from the US should continue to dominate. Offers from Asia and new Saudi Arabian capacity could continue, depending on how attractive European pricing is versus other markets. Eyes are on ExxonMobil’s upcoming new Rotterdam volumes due in 2019. A bullish price trend comes from a global energy price uptrend, with crude oil jumping on the US-China trade spat.
Suppliers were not anticipating any spikes in demand during the second and third quarters. A shift towards Group II use at the expense of Group I is widely expected to be sped up by new specifications late in 2018. What may delay a changeover for some, despite the new ACEA regulations, is price.
Supply of 6cSt is likely to remain comparatively tighter than 4cSt product going forward as greater availability of 4cSt will persist from Russia and Abu Dhabi. However, both grades could see lengthier conditions than seen during the second quarter, should buying interest dip over the seasonally quieter summer period.
Demand for Group III base oils could dip over the summer holiday season, as this period tends to be seasonally quieter. Higher levels of buying interest have been noted for 6cSt product, which has exerted pressure on supply and brought about a price premium for this product over 4cSt base oils.
The US decision to withdraw from the Iran nuclear deal has heightened uncertainty over supply from Iran. SN150 expected to remain tight but SN500 supply may increase. Some Iranian plants are expected to undergo maintenance shutdowns in Q3.
SN150 may see increased demand while SN500 demand is likely to slow, driven by demand in the finished lubricant market for lighter-grade engine oils. The US decision to withdraw from the Iran nuclear deal has heightened uncertainty over supply from Iran.
Spot supply of 150N is not expected to improve but 500N supply is expected to increase and that could weigh on prices.
Demand is expected to remain largely stable as the Middle East is not a major consumer of Group II base oils relative to Asia.
Middle East Group III base oils are expected to be stable as the key producers in the region remain focused on export markets in Asia. There are no known major expansion plans in the region.
Group III consumption in the Middle East is limited and largely opportunistic. Asian spot supply was also expected to be limited.
Group I supply in the third-quarter is expected to be steady, largely balanced to demand. There are no planned turnarounds known for the third quarter. Since strong posted increases took place in the first and second quarters, the third quarter is expected to experience price stability. The US hurricane season extends from June to November, offering a degree of uncertainty.
US Group I demand is steady moving toward the third quarter and is expected to remain good throughout that quarter. Heavy duty vehicles are a key demand sector for Group I base oils, with ongoing good demand expected for this sector in the large agricultural vehicle needs and in power generation equipment.
US Group II supply is expected to lengthen for some grades in the third quarter. Heavy grade 600 availability is increasing, while strong exporting in the 100 and 200 grades is a balancing factor. The US hurricane season extends from June to November, offering a degree of uncertainty.
US domestic demand for Group II base oil is expected to remain steady in the third quarter as the heavy driving and vacation season requires motor oil and other lubricant upkeep in the primary demand sector of the passenger car vehicles. The latter part of the quarter is likely to experience a fade in demand as the heavy driving season comes to an end and the school year begins.
Group III base oil supply is expected to remain balanced to demand in the third quarter, mainly driven by the regularity of traditional importers’ volumes to contracted customers. Newer importers are either bringing in smaller volumes that are not expected to tilt the market, or have already established a customer base that is being served and is also unlikely to tilt the market.
US Group III demand is increasing to keep pace with the need for lighter base stocks that offer excellent friction and environmental performance factors. Passenger car motor oils (PCMOs) of 5W30 and even 0W30 regulations are increasingly required by Original Equipment Manufacturers (OEMs), pushing demand for Group III base stocks.
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Base Oils-Lubes Methodology
About Base oils-Lubes
Base oils are the main component of finished lubricants and are derived from the heavy crude oil fraction in vacuum distillation. They are refined to impart physical and chemical properties that will make a good lubricant. Most base oils are combined with small amounts of chemical additives to form the finished lubricants such as motor oil.
The traditional method of making base oils involves solvent extraction to remove aromatic compounds and solvent dewaxing to take out unwanted waxes. More recently hydroprocessing techniques employing hydrogen and catalysts have been used to make base oils.
Group I base oils which are mostly produced by solvent processing are used in less demanding applications. Group II and III base oils are produced by hydroprocessing and used in higher performing lubricants. Group IV base oils are synthetic oils typically based on polyalphaolefins (PAOs). Group V oils are used in the formulation of oil additives.