Middle East Refiners Disrupt Group III Markets

DUBAI,United Arab Emirates - New competition from Middle East Gulf refiners is disrupting the status quo, increasingly impacting API Group III base oil markets - most notably in Asia - where 4 centiStoke and 6 cSt prices previously made strong gains amid tight supply, an industry insider said during the Middle Eastern Base Oils and Lubricants Conference held here last month.

Asian Group III prices were bolstered by firm production costs and healthy demand, but recent data suggests the sweet spot may be coming to an end, thanks to new players from the Middle East Gulf, says ICIS. After reaching a peak of around U.S. $920/ton free on board (FOB) Asia, 6 cSt prices are coming under pressure in the second half of this year. The Middle East has emerged as an important source of Group II and Group III base stocks as national oil companies seek alternatives in a bid to diversify away from a dependence on upstream revenues.

Izham Ahmad, markets editor at ICIS, said ample availability of Middle East-origin 4 cSt and 6 cSt cargoes in key markets such as China and India since November is putting pressure on prices. Although there has been some impact on Asia origin Group III base oils, buying is still driven by specific needs. At the end of last year, Asian 6 cSt prices defied historical trends and began climbing as expectations of shortened supply and plant turnarounds in early 2018 weighed on markets. The complex market conditions in Asia may also be influenced by ongoing trade tensions.

In the first quarter China imported virtually no base oils from the United States, according to ICIS. However, rising supply from the United Arab Emirates and Qatar accounted for 9 percent of Chinas total base oil imports. China is rapidly gravitating to Group II and Group III base stocks, with demand poised to increase.

Before Group III refiners in the Middle East seize market share from their Asian competitors, they must overcome certification hurdles. Both Abu Dhabis Adnoc and Bahrains Bapco market base oils under their own in-house brands, which requires them to obtain technical approvals. In pricing terms, the Group III market is now split between non-approved, semi-approved and original equipment manufacturer approved materials, particularly in Europe, ICIS says.

Despite the possibility of unforeseen events, Group III market fundamentals suggest significant price fluctuations in Asia are unlikely in the short-term, Ahmad says. Base oil originating from the Middle East is set to stay long in supply, though the domestic Group III market in the Middle East is expected to remain small when compared with Asias market. Still, analysts say pressure on Group III inventories could mount following SK Lubricants plant turnaround in September, implying prices will be resilient and well above 2017 lows, when prices for 6 cSt fell close to $700/ton FOB Asia.

Meanwhile, uncertainty over the impact of the second round of U.S. sanctions on Iran and how events will unfold has increased concerns among traders about potential disruption to base oil supplies from the Middle East. While unresolved, the issue casts a shadow over the Middle Easts claims to be an alternative source of Group II base stocks. Irans bellicose comments against U.S. sanctions include a threat to impose a blockade of the strategic Strait of Hormuz if Iranian oil exports are curtailed. However, analysts say the move could backfire and discount the possibility Tehran will run the risk of provoking a wider confrontation.

Despite the prospect of increased competition, the outlook for Group III base oils is positively supported by the underlying crude oil market, which is forecast to be near to balance in supply and demand next year. According to ICIS, the U.S. Energy Information Administration estimates next years supply at 101.6 million barrels per day and demand between 100.8 and 101.6 million barrels per day.