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Updated to Q4 2019
Supply of light viscosity SN150 from Asia in Q4 remained lesser than SN500 and brightstock grades, whereby supply from northeast and southeast Asia was largely sufficient to meet demand. Reduced southeast Asian output from turnarounds at an Indonesian and a Thai Group I refinery in November was being offset by the restart of JXTG Nippon’s Mizushima A unit in late-November, although the operating rates at the company’s other units in Japan have subsequently been cut to 70-80% due to poor margins.
Overall demand fell in Q4 along with the approach of the year-end lull. Demand for light grade SN150 continued to be curbed because of competitively priced Group II 150N cargoes, while demand for SN500 and brightstock remained comparatively better. Buyers were hesitant to pile up on cargoes amid a slowdown in global economic growth and escalating geo-political tensions. Volatile crude and gasoil prices as well as uncertainties in the development of US-China trade talks further weighed on market sentiment.
Group II base oils supply in Q4 was largely constant as most major Group II refineries in South Korea as well as ExxonMobil in Singapore maintained lower operating rates at their units since Q3 to switch to producing more gasoil due to long supply and poor margins. Gasoil prices steadily rose, tracking crude oil prices. In China, several refineries were either shut for turnarounds or have kept their operating rates low amid oversupply.
Overall demand in northeast and southeast Asia was weaker in Q4 because of the year-end lull. Buyers were mostly non-committal in their purchases as they prefer to keep their stock inventories lean in the year end. Demand in some regions such as China for light grade 150N was largely better in October and November as compared to heavy grade 500N due to seasonal demand for lighter grades in winter.
Supply of Group III base oils from South Korea, the main exporter in the region, was generally stable in Q4 as there were no major turnarounds or further production cuts in Q4. There was a turnaround at a Malaysian Group III refinery from H2 November to around mid-December but lesser supply in southeast Asia was being offset by an ample availability of Middle East-origin cargoes especially in India.
Overall demand in Asia was weaker in Q4 due to the year-end lull, as buyers preferred to keep their stock inventories lean. Demand for northeast Asia-origin 4 and 6cst continued to be better than 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 Group I base oils saw very contrasting supply levels for the domestic and export markets. The domestic market was balanced to long in most cases throughout the quarter, particularly for SN150, while the export market was short of material. SN150 supply was particularly tight for the export market, with players choosing instead to keep available volumes for the domestic market. SN500 material was more balanced across the domestic and export markets.
Demand levels for Group I in the domestic market were steady at fairly low levels through most of the fourth quarter, though there were pockets of higher buying interest in the UK. There was a slight dip in demand due to the fire at Lubrizol’s Rouen plant. Some players had to switch formulations away from Group I material in order to secure additives from other players during the outage.
Group II supply levels were ample in Europe during the fourth quarter. Increased production in Rotterdam during the year meant there was plenty material available at the end of the year. Stocks of heavier grades were slightly lower than those of lighter grades, but there was enough material to fulfil demand for all grades. There was a delayed shipment of 600N material earlier in the quarter which impacted supply of that grade during early November.
Demand for Group II base oils was healthy in the fourth quarter. October and November were strong months as players looked to secure final volumes for the year. Demand was boosted slightly by the fire at Lubrizol’s Rouen plant at the beginning of October. Some players had to switch formulations away from Group I and towards Group II to account for the issues securing additives. Buying interest waned approaching year end as players began destocking.
European supply of Group III material was ample throughout the fourth quarter. There was some length on the lighter grades, while availability of heavier grades was more balanced. Strong demand meant that some players had lower inventories of heavier grades than expected during the fourth quarter but there was still enough material to fulfil buying interest. There were some maintenance outages in the market during the quarter but these did not majorly impact supply levels.
Buying interest for Group III base oils was healthy throughout the fourth quarter as lubricant blending continued. Demand for use in lubricant production was slightly impacted by the fire at Lubrizol’s Rouen plant. Smaller lubricants blenders struggled to secure additives for their production, which dented demand somewhat. Larger customers were not impacted by the fire so most buying interest remained at healthy levels. There was a typical dip in demand at the year end.
Middle East Group I base oils supply was sufficient through Q4. The US decision to re-impose sanctions on Iran from November 2018 had severely curtailed supply from Iran. But the United Arab Emirates (UAE) market was heard to be sufficiently supplied, especially since mid-2018, while demand also slowed since around the same time. 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 market for Iranian material also slowed due to availability of deepsea and Russian cargo. Q4 demand remained slow and sentiment was further dampened by Middle Eastern geopolitical concerns.
Group II 150N and 500N spot supply in the Middle East was stable in Q4 as a reduction in the supply of Asian material was offset by the greater availability of deepsea cargoes. Some Asian suppliers tried to leverage the reduced supply to push for price increases but this was met with limited success. Pricing competition intensified as more Middle Eastern cargoes emerged, putting pressure on Group II prices.
Middle East Group II base oils demand has been weak since early 2019, and there was little improvement in Q4. Spot supply of 150N was deemed sufficient through Q3 but 500N supply decreased either from Asia or other regions. Seasonal slowdowns and uncertainty over US-Iran sanctions and US-China trade war kept buyers cautious. Minor and short-lived price increases seen in Q3 were not sustained in Q4 as high inventory levels dampened the demand for large spot volumes.
Middle East Group III base oils supply was stable to tight. The Middle East was heard to have exported significant volumes of Group III base oils to buyers in Asia at competitive prices and that sapped some of the spot availability for regional buyers, resulting in some price gains.
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 base oils used in place of some Group I applications, due to tight supply of some grades and competitive prices through the quarter. Key Middle Eastern refiners were able to move some cargoes on an ex-tank basis in the local UAE market, but spot supply tightened.
US Group I base oil supply was ample in the fourth quarter, outpacing lukewarm demand. Abundant supply – both in the US and globally – led to price pressure that manifested through discounts. Firm costs offset this pressure and kept posted-price levels steady. Supply became more snug as the quarter went on due to scheduled maintenance at two Group I/II facilities in the US.
US Group I base oil demand was steady but outpaced by supply during the fourth quarter. Downstream, blenders faced compressed margins through most of the year on firm costs but lacklustre, demand and this continued in the fourth quarter. A slumping automotive sector weighed on the markets. Demand remained strong in export markets, particularly Mexico and Brazil.
US base oil supply was ample in the fourth quarter, outpacing lukewarm demand. Abundant supply – both in the US and globally – led to price pressure that manifested through discounts and competitively priced exports. Firm costs offset this pressure and kept posted-price levels steady. Supply became more snug as the quarter went on due to scheduled maintenance at a couple of Group I/II facilities in the US.
US base oil demand was steady but outpaced by supply during the fourth quarter. Downstream, blenders faced compressed margins through most of the year on firm costs but lacklustre demand, and this continued in the fourth quarter. A slumping automotive sector weighed on the markets. Demand remained strong in export markets, particularly Mexico and Brazil.
US base oil supply was ample in the fourth quarter, outpacing lukewarm demand. Abundant supply – both in the US and globally – led to price pressure. Firm costs offset this pressure and kept posted-price levels steady. Supply became more snug as the quarter went on.
US base oil demand was steady but outpaced by supply during the fourth quarter. Downstream, blenders faced compressed margins through most of the year on firm costs but lacklustre demand, and this continued in the fourth quarter. A slumping automotive sector weighed on the markets.
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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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