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Base oils-Lubes: Market overview
Updated to Q2 2018
For the second quarter, supply conditions of Group I base oils are likely to hold steady amid the absence of potential supply changes such as scheduled turnarounds or expansions.
The outlook for demand is gloomy with market players of the opinion that buying appetite would wane going into the second quarter as most buyers were increasingly resistant towards price gains. Some buyers, being already in the red from earlier gains in Group I base oils prices, said they are looking to pay softer prices for April Group I cargoes compared with March.
Spot availability of Group II cargoes is set to remain low in the second quarter as sellers are likely to remain sitting on lean inventories amid ongoing turnarounds at two major South Korea-based refiners' units. Another Taiwan-based Group II base oils maker is poised for shutdown in July, which led market players to expect limited spot output from the refiner leading up to July, as it would build up stocks ahead of the scheduled turnaround.
For certain grades such as 150N base oils, demand would likely remain strong, but for 500/600N, buying appetite could potentially remain weak amid comparatively greater availability. Market participants said that buyers are likely to procure material strictly on a need-to basis in the second quarter, especially since refiners might maintain prices or target price gains amid short spot supply. Some market players said a stalemate situation is also possible, if buyers and refiners are unable to compromise on a price level.
Group III base oils of northeast Asian origin are expected to remain limited in the second quarter, as the ongoing scheduled turnarounds could potentially prevent sellers from offering their spot material readily. Major sellers are poised to focus on fulfilling term commitments. Meanwhile, availability of Middle East-origin Group III base oils is likely to remain stable.
Weak buying appetite from key market China is expected as buyers are mostly amply supplied with Middle East-origin material procured earlier from November 2017 to February 2018. As such, demand for spot material is unlikely to be active. Some traders also added that they do not anticipate active cargo uptake.
With Russian domestic demand set to seasonally increase in the next quarter amid the onset of the agricultural season in the country, supply of Russian Group I volumes into the European domestic market could decrease, meaning overall market availability could tighten. This could mean fewer volumes are made available for the export market, limiting supply there as well.
There are suggestions that demand for SN150 in Europe will increase in the coming quarter as buying interest for the grade is said to be higher during summer. Brightstock is likely to continue to see healthy levels of interest, as it remains short in supply.
Europe’s Group II supply is set to continue to be dominated by US material, though Asian and Middle Eastern volumes are understood to be offered. There is scepticism about how successful this trade flow could be, given the need for a prolonged arbitrage window.
No significant change is expected in Europe’s Group II market demand in the second quarter of 2018. Eyes are on ACEA 2016 regulations kicking in from December 2018 which is expected to see blenders preparing for a greater emphasis on Group II base oils.
Korean and Malaysian turnarounds in late Q1, early Q2 are likely to keep the market balanced, although some expect supply could be on the tight side for approved Group III product in Europe. Once these are over, there could be an easier supply outlook.
"European demand for Group III base oils is expected to remain supported in the second quarter of 2018, amid steady European economic performance and the overall trend of a changeover from Group I."
Supply is expected to tighten further due to reduced availability of Iran spot cargoes, while uncertainty over Iran's nuclear deal with Western nations remains leading up to the mid-May deadline. Iran producers are also expected to channel more supply to the domestic market instead of exports due to lower-priced alternatives available in key export markets.
Demand is expected to remain firm in the initial few weeks of the quarter but trade discussions are expected to slow during the Muslim fasting month of Ramadahn, which starts mid-May and ends mid-June. Buyers will likely stock up on inventories ahead of that.
Supply shortages are expected to persist in Q2, with most Asian refiners not expected to experience significant spot volume increases. The shortage is likely to be worsened by planned maintenance shutdowns during the quarter.
Demand is expected to remain stable in the early weeks of Q2 but buyers have shown less willingness to accept recent price gains. Buying interest in the Middle East market may turn more subdued toward the latter half of the quarter due to the Muslim fasting month of Ramadhan, which starts mid-May and ends mid-June.
Group III base oils supply is expected to remain constant, with Asian refiners still having relatively tight spot availability to offer to the Middle East. Refiners in the UAE are also expected to focus their attention on Asian export markets and are not expected to increase available supply to their domestic or regional markets.
Demand for Group III base oils in the Middle East is also expected to remain constant as the market is still largely dominated by the Group I sector. This situation is not expected to change soon especially with vehicle growth rates in the region expected to remain relatively low.
Moving into the second quarter the Group I refinery in turnaround from mid-March will be in restart mode and returning to full production. Supply from other Group I base oil producers is steady and expected to remain consistent in the second quarter 2018. No fundamental changes are expected in production output for the second quarter, leaving supply factors steady at the quarter’s beginning.
US domestic demand for Group I base oils is steady moving into the second quarter of 2018. Main applications for Group I now centre on heavy duty vehicle finished lubricants, power generation equipment lubricants and marine uses. Some changes are expected to emerge in the marine segment that could begin to shift Group I uses, but the timeline on this is unclear and unlikely in 2018.
Moving into the second quarter of 2018, US Group II base oil supply is stable. Pockets of snug supply developed late in the first quarter but corrected by the end of the quarter, setting a steady pace into the second quarter. No maintenance turnarounds are confirmed for the second quarter in the US, although some are taking place in Asia and may offer opportunities for the US.
US domestic demand for Group II base oil is steady going into the second quarter of 2018. Group II base stocks now form the key base oil for the huge passenger car motor oil (PCMO) end-use segment, replacing Group I almost completely in that finished lubricant sector. Group II base oils meet almost all performance and regulatory stipulations for the PCMOs in the US. Group II base oils are becoming widely used in Mexico and Brazil, keeping exports of these base oils a mainstay for the US.
"Group III base oils supply in the US domestic market is continuing to increase moving into the second quarter of 2018. PetroCanada and Motiva recently entered the Group III supply space and are continuing to add volume for the domestic market. Traditional importers SK Lubricants and Phillips 66 continue to bring in volumes along with new importers ADNOC and BAPCO. ANDOC is bringing in approximately 10,000 tonnes per quarter. BAPCO’s Group III base oils are expected to enter the US domestic market in the second quarter, but at lower volume levels than the other importers."
US domestic demand for Group III base oils continues to grow going into the second quarter of 2018. New engine designs for passenger cars have made the huge passenger car motor oil (PCMO) demand segment a significant growth sector for Group III base oils. In the PCMO demand segment, Group III base oils are joining Group II as the key base stocks to meet the performance standards now in place. Group III base oils demand growth in the US is expected to continue to grow in 2018, with opportunities also developing in South America.
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Base oils-Lubes news & analysis
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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.