INSIGHT: Global base oils markets distressed: supplies critically tight, relentless price increases
HOUSTON (ICIS)–The global base oils landscape is critically tight with demand outpacing available supply, and these conditions are expected to persist at least through the first half of 2021.
The global market has become intensely pressured, and prices are responding to shortages in all regions, especially of heavy grades and brightstock.
US: ‘IT’S NOT LOOKING
While all regions are facing supply shortages and surging pricing, the US faces the added difficulty of unplanned outages following mid-February’s deep freeze, which halted refinery production along the Gulf Coast.
As of mid-March, 39% of US production capacity was offline, according to the ICIS Supply and Demand Database.
This includes Motiva, the largest base oil refinery in the Americas. Two of the plants – HollyFrontier and Calumet – were down for maintenance when the storm occurred but the weather forced additional downtime.
“It’s unbelievable how much inventory has been taken out of the market,” a market player said. “There are no additives out there either. It’s not looking good.”
Brightstock shortages are the worst, with US players reporting offers as high as $8 per gallon, which is nearly $2 per gallon higher than US posted prices.
“The market is in shambles,” a market player said.
With producers sold out and some on allocation, buyers were heard to be looking for brightstock everywhere – even from other buyers.
Suppliers are holding volumes for their contract customers as force majeures and allocations remain in place.
“Demand is so strong, but supply is weak,” a market player said. “I’ve never seen it this bad.”
Buyers in South America, which typically sources 85% of its shortfall from the US, have been forced to turn to Europe and Asia for supply but options are limited and prices high.
US price changes have been relentless, occurring monthly since November, creating an incredibly difficult situation for lubricant blenders to catch up with their own increases.
|Posted Price Increases (cents/gal)|
Finished lubricant price increases since January are around 50%.
ICIS prices have tracked and exceeded these posting increases as non-contract/rateable business is transacting at higher levels.
ICIS prices are approaching record highs that were reached when oil was $100/bbl; oil is hovering around $60/bbl currently.
“Blenders are not going to keep buying at this level; it doesn’t make sense,” a market player said.
Still, market players do not expect measurable improvement in supply levels once US plants fully resume production.
Overall refinery rates need to continue to increase, but that depends on fuels demand. Ongoing tepid demand for jet fuel will keep rates down through 2021.
EUROPE DOMESTIC: STRUGGLING TO FIND
SPOT VOLUMES IN MARCH
The European domestic base oils market remains under extreme pressure because of tight supply in the first quarter.
Groups I, II and III face varying degrees of price pressure, with soaring prices for Group I driving additional demand for Group II as players make substitutions for lower-priced product.
Some Group I suppliers sold out early this month, while others implemented sales allocations.
Heavier grades are tighter compared with lighter-viscosity grades for all groups, carrying a price premium as a result.
“Brightstock is particularly hard to get hold of,” a buyer said. “SN500 is hard to get hold of as well. SN150 is not as bad.”
“It is very difficult to assess reasonable numbers because spot business is basically non-existing,“ a trader said.
Domestic Group I FCA (free carrier) NWE (northwest Europe) spot prices hit record highs this month, according to ICIS data from 2013.
Domestic Group I FOB (free on board) NWE spot prices are at multi-year highs between 2012-2014 depending on the grade.
Group I supply constraints worsened following a number of planned maintenances:
|Repsol||Cartagena, Spain||I||Jan-Feb/March||Company statement|
|Gazprom||Omsk, Russia||I||Feb-March||Company source|
|Lukoil||Volgograd, Russia||I||End Feb-March||Company source|
|Grupa LOTOS||Gdansk, Poland||I||March-April/May||Company source|
|Total||Gonfreville, France||I||Until April||Company source|
|PKN Orlen||Plock, Poland||I||April-May||Company source|
|MOL||Szazhalombatta, Hungary||I||May||Company source|
|Petrogal||Porto, Portugal||I||Unknown – full closure||Company statement|
Additional scheduled shutdowns are in the pipeline for Q2, with continued spot limitations expected.
With supply shortages making business a struggle, some are looking ahead to Q2 to secure product in advance.
“It’s crazy times. I don’t understand the situation of what’s going on here. I receive everyday enquiries for all products, white oils too,” said a producer. “Many customers say if we don’t get it now, we want it next month. They send us the quantity but without pricing.”
The general market sentiment is one of frustration, with refiners offering high prices to distributors, who in turn are starting to fear a backlash from the customers.
“[A producer] sent us the pricing, I don’t know if somebody buys it, we won’t. They offer us an incredible number […] brightstock $1,850/tonne FCA,” said a distributor.
“Maybe they have no volumes and keep some incredibly high pricing, I don’t know. They are definitely very short and trying to make a fortune. Maybe they will be successful.”
Some players expect supply improvement much sooner.
“On the contrary, things are looking up from mid-April to May onwards with a slight increase in availability”, said another buyer. “Hopefully, we see some stability going into Group I and II.”
EUROPE EXPORT: NINE MONTHS OF TIGHT
SUPPLY, NO END IN SIGHT
Shortages have plagued the European export market since July 2020, and the tightness looks unlikely to ease in the coming months.
The export market faced supply constraints before the domestic market last year as players were striving to keep any available volumes for their domestic customers.
There has been no easing of supply since then, with sellers largely sold out of spot material for the first quarter.
Brightstock has been the most limited grade, with virtually no material for export in the first quarter.
SN500 has been getting tighter, and many players expect this also will be non-existent heading into the second quarter.
There is still some SN150 availability for export, but even this supply is low, with minimal bulk volumes on offer.
One source said: “What I hear is there is no product available [in Group I], basically that is it, no product. The situation is very difficult.”
Prolonged shortages have spurred significant price increases across all three grades.
Export players originally hoped there would be more supply in March, but some sellers still have not announced available volumes, and it is likely there will be no real increase in supply for the latter half of the month.
Market participants have turned their attention to the second quarter. Availability is not expected to improve much during April because of planned maintenances.
While there may be some increase in stock levels during May, most players anticipate it to be at least June before there are more volumes in the market.
Some sources are even bracing for tightness for most of 2021.
There has been talk that some lubricant blenders are considering halting production amid a shortage of feedstocks, with export demand at extremely high levels.
One source said: “There are three big blenders in Mexico, one in Panama, a big blender in Kenya, and others dotted around in South Africa, all about to shut down. We are in the distressed stage now.”
MIDDLE EAST: DISRUPTION TO END
CONSUMERS ‘WON’T BE SUSTAINABLE’
Spot supply shortages in the Middle East are showing no signs of improvement with few suppliers daring to even make a wild guess as to when they anticipate a resumption of significant spot trades.
Group I supply has been tight because the main producers in the region, based in Iran, have been struggling with multiple challenges including the impact of the COVID-19 outbreak, sanctions against Iranian shipping lines and increased demand from domestic consumers.
There are four refineries in Iran actively producing base oils, mainly for the engine oil lubricant industry.
Supply from Iran to the region’s main trading hub, the UAE (United Arab Emirates), slowed to a trickle since the fourth quarter, with volumes shrinking to less than half the monthly requirement of the UAE market.
For many of the toll blenders and trading houses based in the UAE, the outlook remains grim as most of these entities rely on spot market activity rather than term contracts.
The UAE is a major trading and blending hub for base oils and is a main entry point for cargoes before they are re-exported to other destinations in the Middle East and Africa.
Some blenders said they’ve had to significantly reduce their output of finished lubricants to account for the lack of available base oils in the spot market.
“Our finished goods volume will be 40% less due to prices,” said one market source.
Others have had to adapt by signing term contracts with suppliers to ensure they have sustained supply to meet their requirements, despite the potentially higher long-term costs.
Since most virus-control restrictions have been eased across the Middle East, demand has shown improvement although Group I supply has struggled to keep pace. Some producers either reduced output during the lockdowns or directed most of their cargoes to term buyers due to the sluggish spot market then.
“The disruption is affecting end consumers in such a way that it won’t be sustainable.”
Even in the Group III segment, spot supply was in severe shortage because producers were focusing their output on meeting orders from contract customers, some of which had been delayed due to shipment problems and the impact of the coronavirus pandemic on refiners’ production rates.
Hence, many of the region’s main producers were unable to allocate much volume to the spot market and are unable to make any prediction as to when the situation would improve for the spot market.
In the Middle East region, Group III and Group III+ base oils producers include Shell’s Pearl GTL project, the Abu Dhabi National Oil Company (ADNOC) and the Bahrain Petroleum Company (BAPCO).
ASIA: REDUCED OUTPUT KEEPS MARKET TIGHT
Group I tight supply in Asia is unlikely to abate until at least Q3 2021, which is longer than initially expected, partly due to the unplanned shutdown at Japanese ENEOS Corp’s Negishi unit in February.
Brightstock prices have more than tripled since low points last summer.
Planned maintenances at ENEOS Corp’s Mizushima B and Idemitsu Kosan’s Chiba units, coupled with the shutdown of ExxonMobil’s Singapore Group I facility since end-May 2020 as well as production cuts at some southeast Asian refiners’ units since early 2020 has exacerbated the tight supply situation.
The Group II supply crunch in Asia may start to ease by mid-year along with the expected restart of South Korean GS Caltex’s unit in May. That said, the speed of the recovery is highly dependent on how quickly shipments from the US and the Middle East to India are able to resume.
Base oils are used to produce finished lubes and greases for automobiles and other machinery.
Insight by Amanda Hay, Eashani Chavda, Samantha Wright, Izham Ahmad and Matthew Chong
Thumbnail image shows lubricants. Source: Shutterstock
Speak with ICIS
Now, more than ever, dynamic insights are key to navigating complex, volatile commodity markets. Access to expert insights on the latest industry developments and tracking market changes are vital in making sustainable business decisions.
Want to learn about how we can work together to bring you actionable insight and support your business decisions?