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Updated to Q1 2021
The already tight supply shrunk further in Q1 partly because of the unexpected shutdown at Japan ENEOS Corp’s Negishi unit from late-January to end-February due to technical issues. This is on top of the company’s planned maintenance at its Mizushima B unit from February to May. Spot availability from Thailand remained scarce as a Thai refiner has taken its unit offline from March to mid-April for maintenance, while ExxonMobil’s Singapore Group I unit remains shut.
Overall demand increased slightly amid the economic recovery in China, India and southeast Asia. The seemingly strong demand carried over from the prior quarter due to a supply crunch, not only in northeast and southeast Asia, but also from the Middle East and Europe. That said, absolute demand paled in comparison to the same period in past years.
Group II supply declined, with spot availability from South Korea and Taiwan remaining limited. South Korea’s GS Caltex shut its Group II and III units from mid-March to end-April for maintenance. Other South Korean refiners ran at reduced rates because of curtailed demand for other fuel products in the crude refining distillation process. The turnaround at India’s Hindustan Petroleum Corp Ltd (HPCL)’s Group I and II units from mid-March further compounded the tight supply situation.
Overall demand in Q1 seemingly improved. A large part of it was the result of the supply shortage not only in northeast and southeast Asia, but also in other regions including the Middle East and the US. Demand for imports in China picked up from H2 February after the Lunar New Year. Demand in India for 150N and 500/600N was relatively stronger than for light grades 60/70N.
Overall supply from South Korea, the main exporter of Group III in the region, dropped in Q1 due to the turnaround at SK Lubricant’s massive Group III unit from March to April. Supply from the other South Korean key refiner – S-Oil – remained constant. Supply from the Middle East continued to be curbed on reduced volumes to China and India from UAE’s ADNOC as well as Bahrain’s BAPCO since around mid-2020.
Demand in northeast and southeast Asia picked up further on recovery in the key downstream automotive sector as economies gradually recovered from last year’s lockdown restrictions. Group III base oils is mainly used in lubricant blending for passenger car engine oil. Demand in India has slowed amid the jump in new coronavirus cases in March, albeit Group III is used to a much lesser extent in the country compared to Group I and II.
European base oils Group I availability was very tight throughout Q1 for both domestic and export spot markets. Heavier grades, particularly brightstock, were extremely limited. Export players sold out of spot material for January, February and March by the second week of each month.
Demand for Group I base oils in Europe was very firm domestically amid ongoing tightness in the region. Interest for lighter grades like SN150 was not as strong, though even this grade had limited availability. In the export market, demand remained very firm across the world, with buying interest for brightstock extremely high. Export demand was seen particularly from Turkey, Nigeria, South America and India.
Supply tightened in Q1 due to a mixture of factors including lower operating rates, increased exports to Asia, fewer US imports and higher demand. Shortages in the Group I market also added pressure on Group II as some blenders chose to substitute the oils for more available and cheaper Group II. Winter storms in the US tightened supply further, with exports from the US limited by the end of Q1.
Demand firmed as Group I shortages and price hikes drove some blenders to make substitutions. Spot availability was unable to keep up with Group II demand. US imports were limited, adding to higher domestic European demand.
Supply was short during the first quarter. This was caused by ongoing tightness from 2020 amid lower operating rates. Maintenance at SK in Ulsan, South Korea, from March compounded existing shortages as imports were significantly reduced. Several players were sold out of spot material for most of the quarter, focusing instead on contracted volumes. Some players were on allocations during the quarter.
Demand was strong during the first quarter. A lack of material meant that players were very eager to find spot volumes. The strong demand, coupled with persistent shortages, led to sharp price rises through the first quarter, particularly towards March. In some cases players who would typically buy approved material began to purchase unapproved material to meet their requirements.
Middle East Group I regional base oils supply was in dire shortage. Group I shipments from Iran were delayed and limited by persistent production and logistical issues following the lifting of virus control measures and due to sanctions on Iranian shipping lines. Supply from other regions was also limited, due to higher prices in Europe and in Asia, discouraging exports.
Q1 demand showed slow and gradual improvement as regional economic activities increased. Some blending plants increased output and restocked inventories but further demand growth was hampered by slow automotive sales and sluggish economic growth.
Group II 500/600N spot supply in the Middle East was in severe shortage as Asian producers had little spot product to export to the region in bulk shipments, preferring instead to export to south and northeast Asia. Supply disruptions and plant maintenance shutdowns also curbed Group II supply.
Middle East Group II base oils demand improved as economic activities increased across the region. However, demand recovery was slow and tight supply of Asian cargoes coupled with higher prices and long delivery times drove many buyers to regional suppliers instead of overseas suppliers.
Middle East Group III base oils spot supply was tight through Q1 mainly because of reduced output from major producers. Major Middle East Group III producers resumed production after lockdowns but backlogged term commitments to India and the US continued to cause shortage of spot supply to regional buyers.
Middle East demand for Group III was stable to firm in Q1. Recovering economic activities in the region powered demand improvement. Sharp increases in prices of Group I and Group II product drove many to seek higher quality of Group III due to better relative value.
Weak fuels demand weighed on US refinery rates, which reached a post-pandemic high of 83% in February before plummeting to the lowest utilisation on record at 56% when a deep freeze stunned the US Gulf Coast. Group I was already tight because of two key turnarounds: HollyFrontier and Calumet. Brightstock and SN500 and 600 were critically tight. In total, 41% of Group I capacity was shut.
Demand was strong, outpacing available supply – particularly for heavy grades and brightstock. Spot sales ceased early in the quarter because of limited inventories and because HollyFrontier and Calumet were planning for their turnarounds. Suppliers struggled to meet contract customer demand when the winter storm prolonged outages.
Weak fuels demand weighed on US refinery rates, which reached a post-pandemic high of 83% in February before plummeting to the lowest utilisation on record at 56% when a deep freeze stunned the US Gulf Coast. Motiva and ExxonMobil Baytown shut down unexpectedly. In total, 38% of Group II capacity was shut. Supply of N600 was critically tight.
Demand was strong, outpacing available supply – particularly of N600 as Group I heavy grades were also critically tight. Suppliers stopped being able to meet all of their contract customer demand when the deep freeze forced outages and allocations went into effect. Following the deep freeze, demand tapered because of force majeures declared downstream from base oils.
Weak fuels demand weighed on both US and global refinery rates. US Group III production was curtailed by Motiva’s freeze-related shutdown, though it is a small portion of the market. Lower run rates in the Middle East and Asia have had a larger effect on availability in the US. Feedstock availability was tight in major Group III-producing regions, which limited cargoes to the US.
Demand was strong, outpacing available supply – particularly of 8cSt but supplies of 4cSt and 6cSt were also limited. Spot sales were largely suspended because of tight supply. Following the deep freeze, demand tapered because of force majeures declared downstream from base oils.
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The main use for base oils is in the manufacture of lubricants, of which there are many thousands of types.
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.