Base Oil Producers Face Painful 2015


LONDON – Base oil producers head into 2015 facing a fundamental change in their economics, according to Valentina Serra-Holm, market director for Stockholm, Sweden-based NynasAB. In her opening remarks to the ICIS Base Oils & Lubricants Conference here last week, Serra-Holm noted that oil prices have fallen dramatically since they stood at a peak of U.S. $115 per barrel in June 2014, reaching a near six-year low of $46 per barrel in January.

Several factors lie behind the rapid price drop, including oversupply, sluggish demand growth and the withdrawal of price supports from the financial community, she explained. These factors are exacerbated by the fact that the major oil producers in the Organization of Petroleum Exporting Countries have decided not to cut back production.

Serra-Holm noted, Despite timid signs of the market heading toward a more equilibrated supply-demand balance, there is still tremendous uncertainty about the future. The big guessing game is whether [crude is] now moving to a range of $60 to $70 per barrel, or whether were about to turn south again and head back below $60 or possibly even $50 per barrel. This uncertainty and volatility in crude pricing is definitely impacting the base oil industry.

Turning to economic output in developing countries, she said, Growth is projected to remain broadly stable at 4.3 percent in 2015 and to increase to 4.7 percent in 2016. That would represent a slowdown from the growth rate forecast a year ago, she added. Three main factors explain the downshift:

First, the pace of investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown. Slower growth in China will have important regional effects, which partly explains the downward revisions for growth in much of emerging Asia, Serra-Holm explained.

In India, the growth forecast is broadly unchanged, however, as weaker external demand is offset by the boost to the terms of trade from lower oil prices and increased industrial and investment activity after policy reforms, she added.

Second, the outlook for Russia is much weaker. This reflects the economic impact of sharply lower oil prices and increased geopolitical tensions, both through direct effects and loss of confidence, Serra-Holm said. Russias sharp slowdown and ruble depreciation have also severely weakened the outlook for other economies in the Commonwealth of Independent States.

Third, for many emerging and developing commodity exporters, the projected rebound in growth is weaker or delayed compared with October 2014 projections. This is due to the impact of lower oil and other commodity prices on the terms of trade, said Serra-Holm. As a result, lower real incomes are now projected to take a heavier toll on medium-term growth.

Finally, Serra-Holm addressed the situation for producers of API Group I base stocks. As of late February, three European refiners have announced that they will convert their Group I production during 2015, and a total of 800,000 tons per year of Group I capacity will disappear, she said.

Another refiner is in negotiations with its unions to close down, at least partially, its Group I production. A fourth plant is for sale and will be converted into a terminal in the absence of a buyer, she added, placing another 700,000 tons of Group I capacity at risk.

These production cuts will prove insufficient since new Group II and III capacity coming on stream largely exceeds the planned closures and will add to an already oversupplied market. Added to modest prospects for demand growth in the mid-term, further production rationalization or reassessment of planned expansion projects are to be expected, Serra-Holm concluded.

Related Topics

Base Stocks    Business