OUTLOOK '18: Europe base oils weigh contracts, oil hike, big spreads

05 January 2018 14:33 Source:ICIS News

LONDON (ICIS)--Following a volatile, unpredictable 2017, Europe's base oils market may be hoping to take a breath in 2018.

Shortages where many had expected length, and vice versa, were trends which marked all three grades to some extent, at some point during 2017, and there is interest in whether there will be a repeat or a steadying of the see-saw.

Though each market is linked, the Group I, II and III segments all have their own unique balances which are likely to dictate how the New Year pans out.

Capacity questions, contract focus for Group I
The Group I export markets in Europe and the Baltic Sea have both experienced tight supply conditions for the majority of 2017, with some relief noted for lighter solvent neutral grades towards the end of the year.

Looking at the outlook for the European export market for 2018, grades such as brightstock and SN500 will probably start the year in well-balanced conditions but SN150 will most likely still be healthy in supply amid a lack of demand for the product.

Market players said that 2017 was the year that the mass of Group I capacity closures seen in recent years had made themselves felt so it is unclear whether 2018 will also suffer the same fate.

Should the year progress without any significant outages, there is a chance that the European base oils export market could see a more balanced year.

However, recent trends in the market have suggested that some refiners are opting to focus their production volumes on contracts rather than the spot market to limit exposure to risk. This could again limit the supply of base oils available on the spot market.

In the Baltic Sea export market, strong domestic demand from Russia was absorbing any excess base oils supply for the spot market during 2017.

In addition, refiners were said to be focusing their base oils production more towards their internal finished lubricant production rather than selling it out on the export market.

The outlook for the Baltic Sea export market going into 2018 is unclear but the year is expected to get off to a slow start as Russian players tend to be out of the market until towards mid-January due to public holidays.

However, in the second quarter, market dynamics tend to shift with Russian refineries typically undergoing a maintenance season, which can occasionally exert pressure on supply.

It is unclear whether the recent crude oil price spike above $60/bbl will be sustained, but if it is, both export markets could see an element of support from this upstream influence as early as January.

Sources generally say that market dynamics tend to outweigh any influence from upstream crude oil prices so how the base oils markets react to the crude oil price will also largely depend on the supply and demand fundamentals in the market at the time.

Overall there are no significant changes or surprises thought to be looming on the horizon, with the market waiting to see whether crude oil prices are sustained in the long term, and if they are, how great the impact on base oil prices will be.

Watching and waiting in Group II
A pair of binoculars and patience may come in handy for anyone watching the Group II’s landscape in 2018. The new year is unlikely to bring any significant changes but is more probably one for watching, waiting and planning.

Market players will be looking for any signs of how ExxonMobil may be laying the groundwork for placing material at its Group II plant under construction at Rotterdam in the Netherlands. (The capacity is yet to be confirmed.)

A hurdle for wider adoption of Group II at the moment, some say, which goes hand in hand with the lack of sizeable domestic supply (with exceptions such as the Lotos volumes in Poland) is the lack of competition.

When US material first entered the marketplace, cheap prices helped it gain a foothold. Increases have made this less appealing, some consumers have said in 2017, and there is interest in whether greater competition will influence prices.

For the time being, US output will continue to dominate in Europe. Tendrils of interest from Asia could be tightly linked to Asian prices, limiting their freedom to come westwards.

One future factor to consider is the offering from major players: where major US exporter Chevron currently offers 110, 220 and 600 equivalents in Europe, ExxonMobil’s new plant is expected to offer 600 and 150 solvent neutral equivalents, the latter of which is an easier swap for the Group I solvent neutral 150.

This may give them an edge for some customers. As one market player speculated recently, could coming to the market second possibly give the world’s largest publicly traded international oil and gas company an advantage? This of course remains to be seen, as does whether they offer any other grades.

But there are “pros and cons” for both slates, another European market source said, and will depend on what additive companies do, as they control the formulations required. Blenders could end up needing both major players’ Group II on site. There is also the question of how other suppliers to the market react to the new domestic capacity.

Group III relationships in 2018 - It's complicated
While the Group I market waits to see whether 2017’s surprise light grade shortness and lengthy brightstock supply will be inverted, and Group II contemplates whether a seismic change is in store from the new ExxonMobil plant, Group III prompts different questions.

Diverging views exist on whether shorter supply of OEM-approved material could support prices or whether there will be a repeat of the ample supplies seen early 2017.

The tables turned for Group III halfway through 2017. Will there be a repeat of the serious shortage that gripped Group III and allowed some producers to sell more expensive Group III+ to desperate consumers?

One crucial difference for 2018 could be the performance of Shell's gas-to-liquids (GTL) plant, which is believed by other market sources to be operating well, in contrast with early 2017's unplanned, prolonged shutdown.

Another question is whether the spread between approved an unapproved product remains remarkably wide.

Material from Abu Dhabi and Russia has boosted non-approved supply in 2017. Approved material is seen as slightly tighter after the recent Neste-Bapco deal believed to cut the amount of base oils from the Bahrain plant which the Finnish firm can market under its approvals.

This comes alongside the more fundamental question of how quickly consumers are shifting from Group I to Group III (and Group II).

What is clear is that Europe’s Group III market will continue to be a complicated beast.

Additional reporting by Sarah Trinder

By Vicky Ellis