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Updated to Q4 2018
Supply of lighter grade SN150 in Asia is expected to remain tight as refiners are gradually shifting away from Group I to Group II production. Supply of SN500 as well as brightstock cargoes will likely stay ample as refiners have accumulated ample stock inventory due to lacklustre sales in the past few months.
Market players were hopeful for Group I demand for SN500 and brightstock cargoes to pick up at least slightly with the onset of the tradition peak demand season in the fourth quarter. However, prices had defied typical seasonal trends in the past couple of years due to various factors such as unexpected plant shutdowns.
Supply will likely increase from the restart of Taiwanese Formosa Petrochemical Corp’s (FPCC) and South Korean Hyundai and Shell Base Oil (HSB) Group II units in September from their turnarounds. HSB further expanded its capacity by 20% during the turnaround period. However, some Group II refiners may switch to produce more gasoil amid rising prices of the latter.
Demand may pick up a little as buyers start to replenish stocks after they had retreated to the sidelines following steep declines in Group II prices in August and September. However, prices had defied typical seasonal trends in the past couple of years due to various factors such as unexpected plant shutdowns.
A northeast Asian refiner may cut its Group III production in October because it is under inventory pressure, market sources said, but the refiner has denied these claims. Lower-priced Middle East-origin material will continue to flood the market due to an abundance of supply from new start-ups in recent years.
Demand for northeast Asian-origin 4, 6 and 8cst lots is expected to remain largely steady as buyers are well stocked-up due to an ample availability of cargoes. Base oils prices had defied typical seasonal trends in the past couple of years due to various factors such as unexpected plant shutdowns.
Supply of European Group I base oils is likely to be balanced, if not erring on the tight side during the third quarter. There is a bout of planned refinery maintenance taking place in southern Europe until October, but the refiner had built up stocks in advance, limiting the impact on market supply.
Demand for European Group I base oils is likely to remain fairly steady and then drop off slightly ahead of year’s end as players look to optimise stock levels. Buying interest for brightstock is to remain strong, with an ongoing buy-tender from Egypt and expectations of higher demand from China.
Supply of Group II product during the third quarter is likely to remain steady, with product flowing from the US. A change in specifications brought in by European car industry body, ACEA 2016, from December onwards could prompt higher demand for Group II base oils and negate any seasonal impact on availability.
Demand for Group II base oils could increase during the third quarter as players plan their shift away from Group I product due to the prospect of commercial Group II production in Europe in 2019. Changes in lubricant specifications from December stipulated by European car industry body, ACEA, could prompt higher demand for Group II oils.
Planned maintenance at Group III capacities during the third quarter could bring tighter supply of approved product although it is unclear as to whether demand will remain constant as the end of the year approaches. Should demand decrease, an element of relief on supply may be felt. Availability of non-approved product should remain steady.
The demand outlook for Group III base oils during the third quarter is unclear, with talk of slightly slower buying interest noted towards the end of the previous quarter. Whether this will be sustained is uncertain but generally buying interest does tend to dip towards year end, when players look to optimise inventories.
Middle East Group I base oils are expected to remain mostly stable to softer in the fourth quarter. The US decision to withdraw from the Iran nuclear deal has heightened uncertainty over supply from Iran. But SN150 could find support due to tighter supply of lighter-grade base oils while heavier grade SN500 could face weaker demand and stable supply.
Demand is expected to remain slow amid ample supply and limited growth in end-user applications. The looming 4 November deadline for the US to re-impose sanctions on Iranian crude exports serves as a major uncertainty for the base oils market and demand is not expected to improve around that time. Further clarity would be needed after that date to spur demand.
Middle East Group II 150N and 500N spot supply in the fourth quarter is expected to be stable to higher but pricing pressure is likely to persist. Asian Group II suppliers facing tough price competition from Middle Eastern producers.
Demand is expected to remain largely stable as the Middle East is not a major consumer of Group II base oils relative to Asia. The looming 4 November deadline for the US to re-impose sanctions on Iranian crude exports serves as a major uncertainty for the base oils market and demand is not expected to improve around that time. Further clarity would be needed post-4 Nov to spur demand.
Middle East Group III base oils supply is expected to be stable to firm in the fourth quarter. Much of the supply is expected to still be destined for export markets in Asia. Supply could increase if rumored expansion plans become reality.
Middle East Group III base oils demand is expected to be stable as the key producers in the region remain focused on export markets in Asia. Group III consumption in the Middle East is limited and largely opportunistic.
Group III base oil supply is expected to increase in the fourth quarter of 2018 as imports from Penthol and BAPCO are anticipated to continue to bring fresh material into the US. Domestic Group III production is also on the upswing, although not in sufficiently significant volumes to shift the Group III supply factor appreciably.
US Group III demand is anticipated to continue to increase in the fourth quarter. This demand increase is consistently being driven in the US from OEMs and blender/compounders seeking light viscosity premium oils for use in the newer engine designs and to meet regulatory stipulations.
US Group II supply is expected to remain ample in the fourth-quarter of 2018, particularly for the 200/220 grades. Underpinning this supply factor is active production utilisation operations at each of the producers’ facilities and fewer exporting options for spot material. Fundamentals are expected to be tilted toward the supply side throughout the fourth quarter.
US domestic demand for Group II base oil is expected to taper in the fourth-quarter. The passenger car motor oil (PCMO) sector, the largest end-use for Group II oils, generally decreases during the winter season. Additionally, export options for spot material are decreased in the fourth-quarter which also affects the overall demand position for the Group II base oils.
Supply conditions for Group I base oil in the fourth quarter are expected to remain similar to those of the third quarter. There are no planned turnarounds known for US Group I base oil units in the fourth quarter of 2018. Posted price reductions that took place in August, 2018 were mainly supply/demand driven and abated by weaker crude oil prices.
US Group I demand is expected to taper slightly in the fourth quarter of 2018. This is a typical trend in the US as the holiday season ramps up in November and many key base oil segments such as automobile and tyre sales experience slower business. Exports are expected to remain steady for Group I for several destinations.
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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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