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Updated to Q3 2019
Supply of light viscosity SN150 from Asia continued to be limited, while SN500 and brightstock grades from northeast and southeast Asia were generally ample in Q3 to meet demand. Supply from southeast Asia increased after ExxonMobil restarted its Group I Singapore unit in early September from a month-long turnaround. Spot supply from Japan increased after JXTG Nippon restarted its Mizushima B unit in late-July and its Kainan unit in mid-June from turnarounds.
Overall demand remained largely flat in Q3 despite the onset of the traditional peak demand season in August and September every year. Demand for light grade SN150 continued to be subdued, while demand for SN500 and brightstock was largely constant. Buyers were mostly purchasing on a need-to basis amid poor market sentiment. Buying interest was being weighed by volatile crude oil prices, escalating geo-political tensions and depreciating Asian currencies against the US dollar.
Group II supply in Q3 dropped after several Chinese refiners were either shut for turnarounds or cut their production amid long supply. In other Asian regions outside China, major Group II refineries in South Korea as well as ExxonMobil in Singapore cut their Group II base oils output by 10-30% to switch to produce more gasoil instead because of better margins of the latter. Gasoil prices were at relatively firm levels for most of Q3.
Overall demand in northeast and southeast Asia was largely flat in Q3 despite the onset of the traditional peak demand season in August and September every year. Buyers were purchasing on a need-to basis amid stagnant downstream demand from the key lubricants sector. That said, demand for heavy grade 500N spot imports was noticeably better in China in late-September, relative to light grade 150N, partly due to reduced supply from local output cuts.
Supply from South Korea, the main exporter of Group III in the region, was largely flat as there were no known shutdowns or production cuts in Q3. Supply from southeast Asia was also constant as the two Group III refiners in Malaysia and Indonesia were running their units normally. Middle Eastern supply to Asia including India continued to be lesser than last year as more were being shipped to Europe and the US.
Overall demand in Asia stayed largely flat amid poor market sentiment despite the onset of the traditional peak demand season in August and September. Demand for northeast Asia-origin 4cst and 6cst continued to be better that of 8cst, which explains the firmer prices of the former two grades. Some buyers in Asia, particularly those in more developed countries, were unable to accept Middle Eastern material as they have specific requirements for their downstream finished lubricants.
European supply of Group I decreased as two refiners in France had production hit by strikes in the region. This did not lead to a great amount of tightness in the market though, as buy interest was low due to the summer holiday period and other refiners had sufficient product to make up any shortfall in supply. Ultimately, conditions were fairly balanced as a result.
European Group I demand during the third quarter was fairly sluggish, with the summer holiday period seeing a number of players absent from the market. Buy interest in Group I tends to be slowing as the market focuses its attention on higher-numbered base stocks, particularly with the new domestic Group II plant in Europe having started this year.
Supply of Group II product was steady in the third quarter, with domestic European production and imports maintaining healthy availability. Europe continued to get product via imports from the US and Asia and via the new domestic capacity which hit the market in February this year. Buying interest slowed slightly as a result of the summer holiday season but availability did not lengthen noticeably, with talks of a refiner potentially slowing output maintaining largely balanced market conditions.
Group III availability was ample but steady during the third quarter, particularly in the case of 4 cSt material. Non-approved product from Russia and Abu Dhabi continued to flow into the market, while the supply of approved product was brought in from Bahrain and South Korea. At the same time, healthy levels of demand were noted, with conditions fairly balanced and prices remaining steady within a wide range as a result, depending on approvals.
Group III demand in Europe was noted at healthy levels during the third quarter, despite the interruption from the typically seasonally quieter summer holiday season. Although demand was healthy, values remained steady within a wide range, depending on approvals, due to the ample availability of product on offer, particularly for 4 cSt material.
Middle East Group I base oils supply was sufficient through Q3. The US decision to re-impose sanctions on Iran from November 2018 severely curtailed supply from Iran. However, the market in the United Arab Emirates (UAE) was heard to have been sufficiently supplied, especially since mid-2018 when demand also slowed. Cargoes from alternative origins such as Russia and Europe continued to weigh on prices and offset any drop in Iran supply.
Since the US decision to re-impose sanctions on Iran in November 2018, there has been heightened uncertainty and tighter restrictions related to supply from Iran. Demand from the UAE for Iranian material also slowed due to the availability of deepsea and Russian cargoes. Q3 demand remained slow and sentiment was further dampened by Middle Eastern geopolitical concerns.
Group II 150N and 500N spot supply in the Middle East were ample. Some reductions in Asian supply due to maintenance shutdowns were offset by the availability of deep-sea cargoes. Price hike efforts by some Asian suppliers, citing the reduced Asian supply, were met with limited success. Pricing competition intensified as more Middle Eastern cargos emerged, putting pressure on Group II prices.
Middle East Group II base oils demand was weak since early 2019 and showed little improvement in the quarter. Seasonal slowdowns and uncertainty over the US’ sanctions on Iran and the US-China trade war kept buyers cautious. Minor and short-lived price increases and high inventory levels dampened demand for large spot volumes.
Middle East Group III base oils supply was largely stable. While the region was said to have exported a significant volume of Group III to buyers in Asia at competitive prices, much of that appeared to have died out as demand slowed. Group III volumes offered to regional buyers in Q3 were fairly stable at largely steady prices.
Middle East demand for Group III base oils remained limited as the region is not a large consumer of the grade. Some substitution trend was seen with Group III being used in place of some Group I applications,due to tight supply of some grades and competitive prices. Key Middle Eastern refiners were seen offering some cargoes on an ex-tank basis in the local UAE market, but uptake was slow and prices remained generally stable.
Several Group I base oils production glitches took place during the third quarter, mostly caused by weather conditions. These pinched supply for some producers and not for others, overall putting snug conditions on most viscosity grades.
Group I base oils demand was stable in the third quarter, upheld by steady economics and good sales performance in motor oils.
Group II base oils supply was mixed during the third quarter, with some producers hit by production glitches caused by weather.
US Group II base oils domestic demand was steady in the third quarter but exports thinned. This was driven by sagging economics in other global regions while US demand was firm and movements into Mexico good.
Most Group III base oils continued to be imported, keeping the supply steady for the quarter.
Demand for Group III base oils in the US continued to grow, driven by new engine designs and the need for low viscosity, high performance 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.
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