Asia, Mideast base oils firm in H1 but some pullback likely in H2

SINGAPORE (ICIS)–Asia base oils Group I SN150 and Group II 150N prices are expected to remain firm on persistently low supply, whereas the heavy grades – Group I SN500 and Group II 500/600N – could come under pressure on ample availability.

Into the second half of the year, base oils supply from Iran are expected to be stable with no known maintenance plans due over the next few months and that could add further pressure on prices amid the weak demand outlook.

Only one Iranian refiner is due for a maintenance shutdown in the second half of the year, possibly sometime in September, according to market sources.

In Group II, like in Asia, short supply of 150N and 500/600N is expected to support prices in coming months but the Group II segment in the Middle East is a much smaller market for producers.

Also the main Group II and III producers in Saudi Arabia, Qatar, Bahrain and UAE also continue to focus on their traditional markets outside of the Middle East due to better demand and higher margins.

Brightstock remained largely stable for June in terms of pricing following deals done at parity with May’s levels, but market players maintained a cautious stance towards brightstock pricing, which would typically see downward pressure towards the end of the year.

The winter season in parts of Asia would typically herald a period of slow cargo uptake for brightstock, as transportation logistics get more challenging.

As for Group III base oils, northeast Asian-origin lots are expected to see support in spot prices from June, as seen from healthy uptake among buyers amid short supply from regional suppliers.

Similarly in the Middle East market, Group I prices started the year on a firm note.

Around mid-February, SN500 prices traded up to $807.50/tonne FOB (free on board) Iran, their highest levels since ICIS began tracking the data in November 2015.

SN150 also traded their record highs about the same time, hitting $727.50/tonne FOB Iran.

These record highs held until early May despite buyers at the time showing increasing resistance to the higher levels and despite the uncertainty that took hold of the market as a deadline for the US to decide on whether it would remain in the Iran nuclear deal.

Then on 8 May, US President Donald Trump announced that the US will withdraw from the Iran nuclear deal and re-impose sanctions on Tehran, consequently driving up crude prices to new highs since late 2014.

Iran’s base oils prices were largely stable in that week, but market outlook has been clouded with uncertainties following the US’ decision to re-impose sanctions on the country.

Group I SN500 prices were stable through the early half of May at $780-805/tonne FOB Iran, while Group I SN150 were holding at $710-745/tonne FOB Iran since early-February, according to ICIS data.

Prices began to decline around mid-May when it became more apparent that the increased sanctions would cause at least some disruptions to business dealings with Iranian entities.

Market players said they encountered difficulties in financial transactions with Iran and many financial institutions were reluctant to take on any dealings involving Iran-based businesses for fear of running afoul of the US sanctions.

On the supply side, market players in the UAE were also saying there was sufficient cargoes having built up over recent months and as such there was less demand for further spot deals in Group I, particularly with the threat of renewed sanctions.

Mid-May also marked the start of the Muslim fasting month of Ramadan, which is a typically slow season for the Middle East.

Certain manufacturing activities are reduced as factories observed shorter operating hours and as many workers took some vacation time as well.

The Eid ul-Fitr long holidays followed the end of Ramadan in mid-June.

Asia’s base oils market trends for certain widely-traded Group I grades snapped out of persistent uptrend in late April, against a backdrop of increasingly squeezed buyers’ margins and waning demand.

Steady gains in FOB Asia spot prices were recorded since September 2017 on the back of regional shortages as demand surpassed output.

This was partly fuelled by natural disasters in the US, when Hurricane Harvey disrupted between 20% and 25% the country’s refining capacity in August.

The disruption to base oils production at some units led to increased appetite for deep-sea shipments from Asia to the US.

In the current market, SN500 prices registered the greatest drops among the ICIS assessed grades, shedding slightly more than 12% of its spot pricing between 13 April and 25 May, ICIS data showed.

Market participants attributed the price dip to lackluster demand brought about by supply overhang of domestically-produced SN400 in the local Chinese market.

Competitive pricing of SN400 amid ample availability curtailed import appetite among China-based buyers for SN500 of Asian origin, especially since some buyers were still holding on to sufficient stocks for the near term.

Brightstock prices also softened, reflecting increasingly squeezed buyers’ margins following steep gains seen from 22 September 2017 to 23 March 2018 in FOB Asia export prices.

Some buyers were also sitting on sufficient inventories from active procurement earlier in the year, leading to waned demand.

This led refiners and traders to cut offers to encourage cargo uptake for May shipment cargoes.

Group II 150N and 500/600N prices largely held up, on the back of potential supply woes in the current summer season amid scheduled shutdowns at major Asian refineries.

Taiwan’s Formosa Petrochemical Corp (FPCC) is expected to go into planned maintenance in July, market sources said.

This led market players to hold on to expectations of buoyed spot prices for Group II base oils in the near term, though significant increase is not expected for certain grades such as 500/600N amid ample spot availability in the region.

Meanwhile, Group III 4 and 6cst base oils largely continued their steady price uptrend, reflecting short supply among key South Korean Group III suppliers.

8cst base oils of northeast Asian origin, amid comparatively greater availability than its lighter counterparts, saw less gains in prices since the beginning of 2018.

South Korean-origin Group III base oils prices were mostly buoyant despite an influx of Middle East-origin Group III base oils into the northeast Asian market since November 2017, as South Korean-origin Group III users adhered largely to using the same material due to formulation restrictions and related OEM approvals.

Focus article by Jasmine Khoo and Izham Ahmad