Closures Could Keep Base Oils Tight

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Assuming that the world continues to make progress against the COVID-19 pandemic, oil refineries should gradually return to normal levels of operation this year and next, meaning an increase in production of petroleum products, including feedstocks used to make base oils.

That would be welcome news for a lubricant industry coping with significant base oil supply shortages. But the closures of several base oil plants will result in a new baseline capacity, an ICIS analyst said during an industry conference last week, and will cause base oil supply to remain tighter than it was before the health crisis.

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Speaking June 30 at the online ICIS Asian Base Oils & Lubricants Conference, Michael Connolly, a consultant with the analytics team at ICIS, noted that the pandemic caused a global shortage in base oil availability by reducing fuels demand to such an extent that oil companies made big cutbacks in refinery operations, which inevitably reduced supply of base oil feedstock.

Not surprisingly, this led to steep increases in base oil prices since October. The run-ups were especially steep for prices on heavy grades of API Group I oils, which roughly tripled, Connolly said. Values have also risen sharply for light-viscosity Group I oils, along with Group II and III oils – all of which roughly doubled.

Fuels demand has begun to recover in some areas – such as China and the United States – and should eventually do likewise in other regions. Where and when that happens, refiners will ramp up operating rates to increase output of fuels but also other products including base oil feedstock.

That’s important, Connolly said, because base oil demand is rising, though at different paces in different regions. In China, demand has already surpassed pre-pandemic levels, and ICIS predicts it will resume the upward trajectory that it was on leading up to the crisis. In the United States, demand has recovered to pre-pandemic levels, where ICIS expects it will roughly remain. Europe has only recovered to 90%-95% of where it was before the crisis, and Connolly said the market will probably resume gradually shrinking, as it was before last year.

While demand and supply are both trending toward normal, it will be a new normal, Connolly said, due to the closure or planned closures of several base oil plants: a Galp plant at Porto, Portugal; a Total plant in Gonfreville, France; a Shell plant in Singapore; an Eneos plant in Negishi, Japan; and an Engen plant in Durban, South Africa. All of those plants are being shuttered because of closures or reductions in operations of their overall refineries.

The combined impact of those closures is a reduction in global capacity, especially for Group I oils.

“Although we are back to a situation where we might expect the market to be more balanced,” Connolly said, “we still might find it in a somewhat tight position in terms of supply because of the loss of that capacity. He said that this would be especially true for heavy Group I oils. If supply does remain tight, it would exert upward pressure for prices to remain elevated relative to crude oil costs, he added.