Asia Group II base oils supply glut lingers despite output cuts

Author: Matthew Chong

2019/07/23

SINGAPORE (ICIS)--Asia’s supply of Group II base oils is likely to remain long despite recent output cuts by some regional refiners against the backdrop of surging crude and gasoil prices since late May.

Base oils are used to produce finished lubes and greases for automobiles and other machinery. (Photo by Ng Han Guan/AP/Shutterstock)

ExxonMobil has cut Group II production at its 1.7m tonne/year Singapore unit by more than 20% from 100% since early July as it switched to producing more gas oil, according to market sources.

South Korea-based Hyundai and Shell Base Oil (HSB) has cut Group II production at its 780,000 tonne/year Daesan unit by more than 10% from 100% since the week of 15 July, market sources said.

Other refiners contemplating output cuts include South Korea’s GS Caltex, which has a 1.15m tonne/year Group II and 148,000 tonne/year Group III base oils capacity at its Yeosu site; as well as Taiwan’s Formosa Petrochemical (FPCC), which has a Group II capacity of 600,000 tonnes/year at its Mailiao unit.

These refiners had put on hold any decision on production following recent losses in crude and gas oil prices.

In the week ended 19 July, gasoil prices with sulphur content of 500ppm (parts per million) dropped by around 5% week on week to $565.5/tonne FOB (free on board) Singapore, ICIS data showed.

Group II base oil prices in Asia have been on a downtrend since end-May, in line with falling crude values.

“The current [Group II] output cuts is not enough to curb [base oils] prices from falling,” a regional trader said.

“More supply reduction for at least three-four weeks continuously is needed to have any impact on prices,” he said.

Group II oversupply stemming from the coming on stream of several Chinese Group II units in March and April this year has thwarted demand for imports in China.

As a result, South Korean and Taiwanese refiners – the main Group II exporters to China – are now looking for alternative outlets for their cargoes amid inventory pressure.

Demand has been especially weak this year due to global economic uncertainties, partly due to the ongoing US-China trade war.

Some market players were hopeful demand would pick up in August and September as downstream consumption in most parts of Asia enter a seasonal peak in March/April and September/October.

“Demand [in India] should improve in late-August and September after the monsoon season ends,” an Indian buyer said.

Feedstock Spread - Gas Oil and 150N Asia

The chart above shows the spread between gas oil FOB Singapore prices and 150N FOB NE Asia spot prices. Refiners' incentive to produce gas oil rather than base oils has decreased slightly following the correction in crude and gasoil prices in the week ended 19 July.

Focus article by Matthew Chong