Asia’s base oil supply transitioned from long to short in recent months because pandemic-related lockdowns slashed demand for other refinery products, hindering refiners’ flexibility to increase base oil production, an industry insider said during an online panel discussion.
“It is true that base oil demand is robust today, and base oil producers are in relatively better shape than [producers of] other petroleum products,” Eric Kim, vice president of new business development at SBC Petrochemical Pte Ltd. said during the Sept. 16 panel discussion, “The Future of our Industry,” held as part of the ICIS Asian Base Oils & Lubricants Virtual Conference in September. “However, base oil production is not as flexible as you simply imagine.” The panel answered questions from virtual conference attendees about what the current COVID-19 pandemic disruption means for the future of base oils and downstream sectors.
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Based in Singapore, Kim is vice president of new business development at base oil supplier SBC Petrochemical Ptd Ltd. Kim previously worked for SK Lubricants in various roles for 16 years.
Kim recommended analyzing the disruption to base oil production in two distinct time periods. The first was the first several months earlier this year after the pandemic started to heavily impact activities on a global scale – roughly around March through June.
“During this period, some Asian countries as you know imposed strict restrictions on social distancing and even locked down their countries,” he recalled. “This caused a sudden, sharp decrease of base oil demand because the finished lubricant producers technically couldn’t operate their plants, or tried not to carry too much raw materials in their [plants]. During this period, base oil supply was in the long position. Whereas the base oil producers are not ready to respond to it properly in the short term.”
The second period of time was from the end of June into mid-September, when the base oil market transitioned into a very different situation. “In general, in the marketplace, base oil is in short position today,” he said during the panel held Sept. 16.
According to Kim, the most frequently asked question by base oil customers at that time was “Why is the base oil supply not enough? Why do base oil prices keep increasing?”
He explained that during the first part of the year, from March through the end of June, base oil producers – which are typically each part of a larger energy-producing organization – experienced an overall decrease of demand and consequently a fall-off in profits.
He pointed out that base oils can account for less than 2% of the volume output from a refinery. “That means that in increasing base oil production, the refinery has to produce other products, which takes up the majority of the production,” Kim explained. “This is very difficult when the demand for other energy products is not as much as it used to be. So in this vein, until the demand for overall petroleum product comes back to normal level, base oil production is likely to remain at limited production, way below their full production capacity.”
He noted that the financial reports of energy companies in Northeast Asia indicate that most are having probably their most difficult year in terms of business profit. “That is mainly because their refining margin is negative, or almost zero,” he said. That may lead them to seek reasons to reduce production at the moment, Kim added, which consequently impacts the base oil industry.