Increased competition from Group II base oils presents difficulties for Group I in Europe, Russia

Source: ICIS News

2019/03/14

LONDON (ICIS)--A recent surge in competitively priced Group II base oils exports from the US has exerted pressure on Group I prices in Europe and has brought about the displacement of Russian Group I product in certain export destinations.

The flow of US Group II product into Europe has increased during the past six months at least, according to market feedback.

Meanwhile ExxonMobil started shipping product from its new Group II plant in Rotterdam in February, marking the first “world-scale Group II production in Europe”.

The plant has a significant capacity of 1m tonnes/year, but it is unclear how much of this product will be used internally and how much will enter the European market.

The increasing amount of Group II product in Europe has made prices quite attractive for buyers and this is allowing them to opt for Group II product over Group I, where possible.

As a result, European Group I export prices have been under pressure since the beginning of the year, to the extent that some refiners are now slowing production because of poor margins.

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Lower Group I demand has been compounding the weaker pricing trend in Europe, as supply has lengthened, with stocks reaching maximum levels at some refiners earlier in the year.

It is a given that weaker prices for Group I product is bad news for European refiners. That said, these softer values have meant that European export volumes have been able to find market share in export destinations that tend to rely on Russian product.

If the price is right, it has been suggested that players in certain export destinations will opt for European product as it is not subject to certain duties, is higher quality and is compliant with Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) legislation.

RUSSIAN EXPORTS LOSE GROUND
Parts of west Africa and countries such as Turkey which would usually opt for attractively priced Russian volumes are now said to be opting to purchase European Group I product as the specifications are of a higher quality for around the same price.

In addition, parts of Europe which tended to substitute Group I supply with Russian volumes are now also seeing competitive offers from European refiners, loosening that reliance on Russian base oils.

This situation has brought about a chain reaction whereby prices for Russian product in the Baltic export and Black Sea export markets have dropped as Russian refiners lower offers in order to secure buying interest and offload their growing inventories.

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Players are in no doubt that this has resulted in very weak base oil margins, if any, for Russian refiners.

Whether the current situation will persist remains unclear, with mixed outlooks noted for these Group I export markets. Players suggest a slightly softer trend could continue, particularly on products that have seen robust pricing over the past year, such as brightstock.

The refinery maintenance season has begun, with facilities in Europe and Russia set to undergo maintenance going into the second quarter and potentially over the summer in at least one case.

Players hope that this maintenance period will bring more balance to supply, but this depends on Group II product flows and prices.

US Group II prices were said to be gaining some support from a rebound in crude oil values and, should this feed into landed Group II prices in Europe, appetite for Group I volumes may show improvement.

However, upstream costs could be outweighed by the growth in Group II supply in Europe, which could limit any crude-related gains.

In addition, the European market has been transitioning towards higher-numbered base stocks for a number of years, with substantial curtailment of Group I capacity already.

'A BIG MESS'
This year feels different though, with the transition accelerating as Europe witnesses the first large-scale domestic production capacity of Group II and regulations nudge blenders towards more energy efficient types of base oils.

“It’s a year of uncertainty, a big mess. A year when people will need to find blenders and traders and a new place in a new world, a new market that's in an ongoing transformation which will be very painful with many companies being kicked out of this industry and people needing new jobs. It will be difficult for everyone. Big guys, small guys,” a trader said.

The trader added that his was happening during a "huge economic stagnation" which was reducing consumption sharply, adding that refiners and traders were well placed to "confirm that everyone" is noting the negatives.

"Refineries more so than trading companies. Do you see people queuing for new cars? Is buying a new car a priority for people? People have different priorities and need to buy food, take care of their health and family," the trader added.

"Buying a new car is so far away from [a] main priority. It’s a different world today. People are inert and don't realise what is happening.”

Picture source: Shell 

Focus article by Sarah Trinder