OUTLOOK ’18: Middle East base oils to stay firm on continued supply crunch

Source: ICIS News

2018/01/05

SINGAPORE (ICIS)--Middle East Group I base oils are expected to remain firm in the early months of 2018, as supply shortages persist and as producers hold prices up to factor in the impact of higher crude oil values.

Group I base oils in the Middle East were on a broad uptrend through much of 2017, partly due to the trend in crude oil prices and while demand for Iran-origin material stayed healthy.

While there have been some occasional deep-sea cargoes available through the year, the impact of Hurricane Harvey in the US brought those to a halt due to the higher prices and stronger demand out of the US.

2018 could see further changes in the base oils supply structure in the Middle East with the Group I sector likely to be almost completely dominated by Iranian refiners while refiners in the GCC (Gulf Cooperation Council) region focus more on higher-VI Group II and III base oils.

In the region, Saudi Aramco’s Luberef is currently one of the main Group I producers, while the region also occasionally sees supply of Asian and at times Russian Group I cargoes.

In December 2017, SN500 prices in the UAE hit their highest levels since 2014 while prices in Iran traded their highest since ICIS began tracking the data.

In the UAE, SN500 prices hit $800/tonne CFR (cost & freight) UAE (United Arab Emirates) while in the domestic market prices rose to $810/tonne ex-tank Sharjah.

In Iran, SN500 prices hit a high of $780/tonne FOB (free on board) Iran. More gains are expected as shortages persist.

The persistent gains in Iran-origin Group I could continue to open up opportunities for deep-sea cargoes amid healthy supply.

In 2017, prices for non-Iran origin SN500 were higher, with deep-sea cargoes heard offered in UAE at $830/tonne CFR UAE in December.

Going forward, upstream prices remain key as crude oil prices remain buoyant, while Iranian supply is expected to remain stable in the early months of 2018.

In the Group II sector, supply of Asian-origin cargoes is also expected to remain relatively tight through the first quarter of 2018.

The main Asian producers of Group II were still very much focused on meeting contract obligations in northeast Asia, where they could achieve higher netbacks even in the spot markets.

But with supply conditions in the US improving amid ongoing recovery following hurricanes Harvey and Nate that flooded the US Gulf Coast in late August, more cargoes could eventually be freed up for Middle East buyers although this may not happen anytime within the first quarter.

Market players are also looking for some supply improvement from Middle East origin Group II.

Currently Abu Dhabi National Oil Company (ADNOC) is the only refiner in the Middle East region producing Group II base oils.

Saudi Aramco’s Luberef is due to start Group II production at its 550,000 tonnes/year Yanbu facility in January 2018.

If so, it is widely expected to stop production of Group I base oils, leaving the market largely in the hands of Iranian suppliers.

So far, however, there have been no updates as to whether Luberef is on track to start Group II production and sales in January 2018.

The company currently operates two units at Yanbu and Jeddah in Saudi Arabia with nameplate capacities of 280,000 tonnes/year and 270,000 tonnes/year respectively.

Both plants presently produce Group I SN150, SN500 and brightstock grades.

In Group III, Adnoc cargoes have been actively sold to Asia and to Europe.

But from January 2018, Bapco is also due to start selling its own brand of Group III alongside Neste’s.

Neste and Bapco have a joint venture facility in Sitrah, Bahrain, that produces 400,000 tonnes/year of Group III base oils.

Under the original JV agreement, Bapco was the sole operator of the plant, while Neste was responsible for sales and marketing of all output from the plant.

On 8 November Neste said that, while the original JV agreement remained unchanged, the new commercial terms would allow Bapco to sell some Group III base oils under its own brand from 1 January 2018.

Neste, meanwhile, would continue to sell a “significant share” of base oils output from the plant.

The new arrangement means Neste and Bapco would essentially be producing similar products from the same plant but would likely be sold at price differentials that could be as wide as $100/tonne, according to market players.

Neste’s Group III base oils have already achieved Original Equipment Manufacturers’ (OEM) specifications approvals, and as such carry a premium over the price of base oils from refiners that have not yet secured such approvals.

Outlook article by Izham Ahmad