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Updated to Q2 2020
SN500 supply dropped further in Q2 as ExxonMobil shut its Singapore Group I unit in end-May due to poor production margins. A company spokesperson said the shutdown is not permanent, without disclosing further details. Other key Group I refiners in southeast Asia ran their units at reduced rates, while Japan’s JXTG Nippon was running several units, including its Mizushima B unit, at below full capacity after restarting it in March from a turnaround.
Overall demand in Asia outside China deteriorated due to the coronavirus pandemic. Southeast Asian countries were under lockdowns in a bid to contain the spread of the virus. India was particularly hard-hit as downstream lubricant production came to a halt in April, although plant operations recovered slightly by June with the easing of some lockdown measures. China was the only bright spot as production recovered significantly after lockdowns were eased.
Group II supply recovered in Q2 as Chinese refiners ramped up their production to 90% from April onwards along with the easing of lockdowns in the country. Many Chinese units were either shut or cut their production in February and March. Output in other major Group II producing regions such as South Korea, Taiwan and Singapore remained largely steady during this period with no known major turnarounds.
Demand recovered strongly in China as lockdown measures eased from March onwards. Increased exports of downstream lubricants from China during this period contributed to healthy demand for base oils. While demand in other Asian regions including India also improved with the easing of lockdowns in May and June, its recovery was slower and more gradual compared with China.
Supply from South Korea, the main exporter of Group III in the region, remained flat in Q2 as there were no major turnarounds or further production cuts at two key Group III refiners in the country. Supply from the Middle East increased following the restart of ADNOC – a major UAE-based Group III exporter – in late April from a turnaround, although spot availability was not abundant in the two months after the restart.
Demand in China improved from March with the coronavirus spread having come under control, although this was offset by slowing demand in other Asian regions as most countries were under some form of lockdown restriction from March to June, which curbed vehicle usage. An increase in China exports of downstream finished lubricants during this period contributed to healthier demand for Group III lots, which mostly find applications in engine oil lubricants for passenger cars.
The base oils Group I market saw a drop in production during Q2 amid the coronavirus pandemic, which peaked during April-May. Refiners focused most of their stock on the domestic market which saw less of an impact on availablity due to favourable prices. The export market saw less supply as low prices made it less favourable to send material outside of Europe.
Demand for Group I base oils saw a big hit in Q2 due to the coronavirus pandemic. The temporary closure of OEMs saw buying interest drop significantly, although it began to recover by the end of the quarter. In the export market, movement restrictions in key demand sectors muted interest although there were pockets of demand in north and west Africa.
European domestic Group II base oils supply was healthy at the start of Q2 and as the quarter progressed inventories remained full as buying appetite dried up. The coronavirus pandemic led to reduced demand for base oils, especially as travel restrictions were in place. The Group II import quota was not exceeded over the first half of the year, therefore volumes were not impacted by duties.
Demand crashed between April and May due to reduced consumption as a result of the coronavirus pandemic. Spot prices fell as a result of weakened demand during these months. However, the downtrend came to an end in June, where market fundamentals stabilised, as did spot prices. While demand has improved in comparison to the start of the quarter, the Group II market remains subdued in comparison to Group I and III, where demand notably increased.
European domestic Group III supply was ample during April and May, with some producers choosing to lower operating rates while the pandemic stifled demand. However, increased consumption in June soon led to shortages in the market. The Iberian Lube Base Oils Company (ILBOC) plant in Cartagena, Spain, was running at reduced rates in Q2 and as a result, the producer had to set spot allocations for some grades in June.
Low demand in April and May sent spot prices tumbling, with sellers offering competitive prices in order to encourage sales. However, supply shortages and increased demand in June led to firmer spot prices at the end of the quarter. Demand for Group III material is the highest in comparison to Group I and II.
Group I base oils supply was stable in Q2 while lockdowns and other restriction measures to control the coronavirus outbreak continued. While shipments from Iran were delayed, onshore supply in the main trading hub, the UAE, was sufficient to meet market needs.
Q2 demand was severely crimped as lockdowns and other restriction measures to control the coronavirus outbreak continued in the region in the early part of Q2. Many blending plants ran at lower rates amid weak demand and labour shortages, while slow automotive markets also dented downstream demand.
Group II 500/600N spot supply was ample in Q2 as some Middle Eastern buyers secured shipments of heavy grade product from Asia and had offered these to other buyers in the region. Other shipments were also available in the local market, putting downward pressure on the market as lockdowns and virus-control restrictions continued.
Group II base oils demand was severely dampened in Q2 due to lockdowns and virus-control restrictions. Additionally, congestion at ports in the UAE caused major delays for import shipments and buyers were hesitant to procure deep-sea product on concerns of higher costs.
Group III base oils supply was sufficient through Q2, although port congestion in the UAE caused delays to some shipments. A major Middle Eastern producer resumed production after maintenance shutdown, but the output rates remain unclear.
Demand for Group III base oils was dampened by lockdown measures to contain the coronavirus outbreak as well as by port congestion in the UAE.
Group I production fell during Q2. Refiners trimmed operating rates as demand fell off from downstream applications amid coronavirus-related closures. Despite reduced production, supply was adequate to meet weak demand during this period of reduced manufacturing and industrial activity.
Demand dropped during Q2 by about 50%. A wide swath of manufacturing and industrial closures sidelined demand for base oils. Group I did not see as large of a demand dent as other API groups as it is less exposed to the automotive sector. Some operations in the industrial sector were deemed essential during coronavirus closures and were sustained.
Production fell during Q2. Refiners trimmed operating rates as demand was sidelined in downstream industrial and automotive applications due to coronavirus-related closures. As a major global supplier of Group II material, the US grappled with supply length despite the trimmed rates amid domestic and global demand destruction. US producers largely did not have an option to manage length through exports.
Group II demand fell during Q2 by about 60% because of the coronavirus. The decline was greater than that of Group I because of mixed automotive and industrial end-uses. The US is a major global supplier and demand was sharply lower in key export markets as well. Some material was exported, but demand dropped sharply from key markets in Mexico, Europe and South America. Cargoes that did go out were done at much lower prices.
Group III supply fell during Q2 amid reduced production in North America as well as reduced import volumes stemming from the coronavirus. Refiners trimmed their operating rates amid demand destruction. Despite the reduced supply, inventory levels were sufficient to meet historically weak demand.
Demand dropped by about 70% during the coronavirus closures of Q2. With the heaviest exposure to automotive engine oil, the decline in Group III demand was the sharpest. Automakers shut their production lines and drivers stayed off the road for about two months in the US.
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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.