Europe domestic base oils supply rides high into Easter despite turnarounds

Source: ICIS News

2019/04/17

LONDON (ICIS)--European base oils supply remains high going into Easter,  especially for Group I and III, with few signs of change despite rising oil prices which could prompt refiners to cut back base oils supply.

- Margins pressured by rising upstream values

- Minimal tightening effect from Group I, III turnarounds

- Questions over Q2 balance outlook after maintenances end

Healthy supply from European refiners and traders remains a key theme across all Group I grades, despite European and Russian turnarounds (see chart) resulting in consistent price decreases in early 2019.

Rising feedstock prices also figure strongly in market discussions, with sources arguing that refiners could potentially reduce output in favour of producing more diesel.

However, there is no clear indication of this trend in the market yet.

Selected key maintenances
Plant Group Site Dates Source
Petrogal I Porto, Portugal March-20 April Company source
Lukoil I Perm, Russia 1 April, 50 days Company source
Tatneft III Russia April, 3 weeks Market sources
S-Oil III Onsan, Korea March-April Company source
PKN Orlen I Poland 6-8 weeks, Q2 Market sources

"At the moment, there is more desperation on the sellers' side. We get a lot of calls from suppliers and not so many from buyers. That clearly points out it's still a buyers market and a long market," said one European trading source.

"Producers are not making money now. The margin has come down seriously. How long they will go like this? Instead of making base oils, [it could be] better to sell gasoil or VGO [vacuum gas oil] ... They have to do something - either put up prices or cut [production]," said an international distributor.

Margins are under pressure since falling values for a lighter grade of base oils, SN150, have shrunk the spread with VGO for domestic and export grades to their weakest point in at least a year in early April, according to ICIS data.

There are rarer discussions of more balanced supply or slimmer Russian supply on the back of maintenance.

The market could potentially come into a more balanced position if refiners do reduce output.

If US Group II becomes less of a threat in Africa, this could be a release vale for material to flow out of Europe and possibly boost European export prices, or take excess material out of Europe.

Another factor to watch is the Russian agricultural season. So far, market players have said demand has been rather improvable - it it roars into action and boosts lubricants demand, this could leave less material in the Baltics market for export to Europe.

GROUP II WATCHING THE US
In the Group II market, healthy supply contributed to prices being assessed down earlier in April.

In light of recent lifts in posted prices from several US refiners in April, there may be calls from the US for higher prices in Europe, unless there is a reversal in US values).

Market feedback in April has indicated European unwillingness to bring material over without a guarantee of better values on the continent.

Having said this, there is a view that oversupply in the US Group II market may persuade refiners to send material out of that region to protect local margins and export material, and this could maintain export volumes.

Offers of material from the new Rotterdam plant are not widely noted in the market, although some sources said there had been some competitive prices, but it is unclear how common these are.

Product from the new plant is not expected by many in the sector to affect the market until later in 2019.

GROUP III LENGTH PERSISTS
Europe’s Group III prices were unchanged in the week to 16 April, following recent falls led by weaker Group I values and high supply.

Europe’s market has plenty of material, with offers from local production as well as South Korea, Malaysia and the Middle East.

"The Group III market is still very long," said a European base oils source.

Opposing forces of crude and high supply could cancel each other out and create stability over the next month, argued a northwest European distributor.

"I do not see a big move in either direction. There's too much pressure on crude oil and raw material side. It can't go much lower or better shut operations off. On the other side, there's enough volume around," said the source.

There was minimal impact from planned maintenances at S-Oil’s Korean and Tatneft’s Russian plants. The Russian supplier may have begun to offer material again, which could refresh that flow of material to Europe.

One balancing factor could be demand growing stronger in April, after producer feedback pointed to it stepping up consistently over first quarter of 2019.

Strong buying interest is also evident in the UK market.

After the Easter break, European base oils buyers and sellers will be closely monitoring feedstock moves and the supply outlook for cracks in the current market situation.

A key question many will be asking is what happens if length grows even more sizeable after the end of turnarounds.

Focus article by Vicky Ellis

Additional reporting by Sarah Trinder