OUTLOOK ’17: Europe base oils market to be driven by supply, crude oil

By Sarah Trinder

LONDON (ICIS)–Solvent neutrals availability and crude oil prices look likely to be the main drivers in the European base oils market during 2017.

A number of Group I capacity closures in 2015 had left some players expecting brightstock supply to tighten during 2016, but this was not the case.

The scenario expected for 2016 had been that Group I capacity closures in 2015 – amounting to around 1.5m tonnes, according to some sources – would leave availability of brightstock in Europe tight, with it ultimately becoming a niche product.

However, this has not been the case during 2016, with producers focusing on production of heavier grades in Europe and supply of SN150 and SN500 tightening.

Limited supply of SN150 and SN500 has been exacerbated by unconfirmed outages at plants within Europe.

The tight conditions on the solvent neutral grades, combined with firmer upstream costs and weaker euro versus US dollar exchange rates, has resulted in expectations that domestic Group I prices will increase around the beginning of 2017, at least in the case of SN150 and SN500.

The outlook for brightstock is cloudier, with recent lengthier supply conditions having translated into lower prices. However, one source suggested that availability of brightstock is already balancing out amid signs of healthier demand and that length could be absorbed during 2017.

A lack of arbitrage opportunities has meant the European export market has been illiquid throughout the year. Again, it is unclear whether this will be the case during 2017 as a lot hinges on whether markets such as Nigeria, become viable for exports again.

Solvent neutral supply in the Baltic and Black Seas were also tight towards the end of 2016 but there were signs of availability potentially improving. The winter holiday period and first half of January tend to be fairly quiet for these markets and it remains to be seen whether this will bring any balance to market conditions.

Fundamentals aside, crude oil values and their impact on downstream vacuum gasoil (VGO) prices could also influence the base oils market in Europe during 2017.

There is usually a time lag of between a month to three months before such upstream costs filter into base oils prices, depending on whether fundamentals outweigh this influence, so rises in VGO prices seen during Q4 2016 are yet to be seen in base oils values.

However, sources expect firmer VGO values to underpin base oil prices at current levels at least, if not support firmer values further down the line.

Crude oil supply is expected to balance out, if not tighten, during 2017 amid an OPEC deal to curb production. Should crude oil prices increase on the back of this, vacuum gasoil (VGO) prices could also increase and this could eventually feed into downstream base oil prices.

Although there are potentially some bullish signs on the cards for 2017, the outlook for base oils in Europe remains uncertain and entirely dependent on how the supply/demand balance plays out in 2017, and whether these fundamentals outweigh the influence of upstream costs.