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Updated to Q4 2020
Asia
Group I
Supply remained largely flat despite the November restart of a unit by Japan refiner ENEOS Corp from a turnaround. This is because ENEOS is stocking up cargoes ahead of its other unit’s turnaround from February to May 2021. Spot availability from Thailand remained limited as a couple of Thai refiners continued to run their units at reduced rates, while ExxonMobil’s Singapore Group I unit has remained shut since end-May 2020.
Overall demand in Asia including India for Group I material seemed to be have improved tremendously in Q4 but it was largely due to extreme supply tightness which caused demand to appear strong. Buyers were scrambling for cargoes because of limited spot availability not only from northeast and southeast Asia but also from the Middle East. Absolute demand was not actually better as compared to the same period in past years.
Group II
Group II base oils supply was largely stable despite the restart of South Korean S-Oil’s Group I and II units in September from a turnaround. Other South Korean refiners continued to run their units at reduced rates because of suppressed demand for other fuel products in the crude refining distillation. Taiwan’s Formosa Petrochemical Corp (FPCC) had limited spot availability as it had cut its unit’s run rate to 90% of capacity, from full rate, from December 2020 for two months.
While overall demand in Q4 was noticeably stronger, it was attributed more to the supply shortage in various regions, including the Middle East and the US, rather than an absolute increase in demand as compared to the same period in the past years. Demand for imports in China picked up as prices of local cargoes become less competitive. Demand in India for light grades 60N/70N and 150N as well as heavy grade 500N also strengthened.
Group III
Supply from South Korea, the main exporter of Group III base oils in the region, stayed largely flat in Q4 2020 as there were no major turnarounds or further production cuts at a couple of key Group III base oils refiners in the country. Supply from the Middle East remained weighed on by lower volumes to China and India from UAE-based ADNOC and Bahrain’s BAPCO since mid-2020.
Demand in northeast and southeast Asia improved on the gradual recovery of the key downstream automotive sector, due to the easing of lockdown restrictions. Group III base oils is mainly used in lubricant blending for passenger car engine oil. Automotive sales in India also saw a gradual recovery, although Group III base oils are not as widely used in the country as compared to Group I and II.
Europe
Group I
The market tightened significantly in Q4. Refinery run rates remained low, and combined with global shortages, this meant that European players had very limited spot material for either the domestic or export markets. The export market tightened more quickly, with players keeping any available volumes for the domestic market. European sellers were largely sold out of export material for most of Q4.
Buying interest was very strong in Q4, boosted by limited availability. Spot demand remained healthy in the domestic market even in December, when interest typically wanes for the holiday period in the region. Demand for export material was seen in several destinations that would typically be supplied by other regions, including South America, India, UAE and some Asian countries.
Group II
European domestic base oils Group II supply tightened over Q4, with a lack of imports as well as high domestic demand leading to shortages. Spot availability became more restricted as the quarter progressed. Imports from the US dried up after outages in the Gulf Coast following extreme weather conditions in Q3.
Demand for Group II increased, particularly due to shortages in the spot market. The lack of US imports left a gap in the European market which is yet to be filled. The market remained tight in late-December.
Group III
Supply limitations worsened during Q4 in the European domestic Group III market. With production rates lowered and a number of producers facing supply constraints, the market was short of product in the second half of the quarter. Higher viscosity grades were tighter in comparison to lower viscosity grades. Spot availability was extremely limited by December, with most sellers already sold out for the year.
European domestic Group III demand rose in Q4, with growing supply constraints placing further pressure on producers. Higher demand saw prices soar in November. By early December, some traders were unable to find stocks for customers and an increase in enquiries was not met.
Middle East
Group I
Supply was tight in Q4, as 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 Asia, discouraging exports.
Q4 demand showed slow and gradual improvement as lockdowns in the region were lifted. Some blending plants increased output and re-stocked inventories, but further demand growth was hampered by slow automotive sales and sluggish economic growth.
Group II
Spot supply was tight in Q4 as Asian producers had limited spot product to export to the region in bulk shipments, preferring instead to export to south and northeast Asia. Supply disruptions and maintenance shutdowns also curbed supply, keeping the market supported.
Demand improved as lockdowns and virus-control restrictions had been lifted in 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.
Group III
Spot supply was tight through Q4 with sporadic port congestions and reduced output from major producers as the main factors. Major Middle East producers resumed production after lockdowns, but backlogged term commitments to India and the US resulted in a shortage of spot availability to regional buyers.
Demand was largely stable in Q4. This was, however, countered by limited spot availability especially through much of the quarter, keeping prices supported and dampening demand interest for Group III from Middle Eastern suppliers.
US
Group I
Nine months of curtailed refinery rates due to weak fuels demand resulted in less feedstock VGO and therefore lower base oil run rates. Supply was mostly sufficient for contracted customers but tight on a spot basis. Mid-to-heavy grades were in shorter supply, while brightstock remained short.
Demand was stronger than it typically is in Q4, mostly because of tight supply. Uncertainty about availability and price increases drove buying interest. With shortages in other regions, export demand remained strong.
Group II
Nine months of curtailed refinery rates due to weak fuels demand resulted in less feedstock VGO and therefore lower base oil run rates. However, Group II supply increased from Q3 because Excel Paralubes had resumed operations. Availability improved for exports. Mid-to-heavy grades were in shorter supply.
Demand was atypically robust, mostly because of tight supply. Uncertainty about availability and price increases drove buying interest. With shortages in other regions, export demand remained strong. Spot movements to India and Latin America resumed in November after suppliers recovered from hurricane outages.
Group III
Group III was the tightest, driven by reduced refinery rates. Supply of 6cSt and 8cSt was shorter than 4cSt. Some suppliers focused on the Europe market, creating tighter conditions in the US. Supply constraints drove pricing higher than pre-coronavirus levels.
Demand never dropped as is seasonally typical. Uncertainty about availability and price increases drove buying interest. Suppliers were not able to satisfy spot demand, staying focused on honouring contractual agreements.
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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.
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