2018 was seen by many in the base oil industry as a turning point, in some EMEA markets at least.

Over the past decade, the gradual demise of API Group l capacity in Europe has reached a point where some refiners are asking whether they should continue producing at all. Those refiners that were, and still are, dependent on far-flung export destinations to absorb current capacity saw demand decline due to alternative sources for traditional Group l markets, such as West Africa.

The Middle Easts Gulf region saw a continuing rise in quantities of exported Group III grades, which have firmly established themselves in regions where market share is difficult to capture. This activity, from units in the United Arab Emirates, Bahrain and Qatar, made the Gulf a new force to be reckoned with for the provision of Group III stocks.

This was balanced against the reimposition of the United States sanctions on Iran, which continue to have an effect on exports of its Group l oils and other petroleum products.

The same region saw Luberefs new Group II facility in Saudi Arabia targeting markets in India and the Gulf and even transiting the Suez Canal to the Mediterranean. Also on the Group II front is the imminent commissioning of ExxonMobils plant in Rotterdam, the effects of which are yet to be fully evaluated.

These ongoing changes took place against a backdrop of fluctuating crude and feedstock prices, which went against most year-end 2017 forecasts. Crude rose to around U.S. $80 per barrel by mid-year, a new high since 2011. This trend continued until September, when Dated Brent sank to $50/bbl by year end. This may have been due to the increase in U.S. shale oil production and the failure of Saudi Arabia and Russia to live up to pledged production cutbacks. Both seem to have increased output during the latter part of the year to new daily highs.

Despite slowing Iranian and Libyan output, global crude production is still outstripping demand, which according to some is due to a forecast economic slowdown.

The effects of these factors on base oil prices were considerable, with the market fluctuating in response to fundamentals. But to tie this to base oil pricing during 2018, it is best to look at the various types of market and their sectors.

Group l started the year with reduced production capacity from Europe, although this deficiency was deflected by Russian export grades through Baltic ports. The availability of these products compensated for lost Group l production from plants such as Coryton in the United Kingdom, Pernis in the Netherlands and Dunkerque in France and reduced capacity at other plants like Gonfreville, also in France.

Prices were stable with values rising in tandem with crude and feedstock, and although demand started to falter, margins and price realizations were acceptable against the alternative optional production of distillates.

Prices continued to stay relatively strong until demand dwindled. Some sources in the market attributed this to the inevitable growth of Group II, although prices in that sector stayed higher than Group l, from which they remained relatively detached.

The demand slump caused a ripple effect in Group l markets at a time when alternative sourcing was adding to Europes woes, with Group l material available again from U.S. suppliers, which had recovered from the 2017 hurricanes. Base oils were available in more quantity, lower price and easier to ship than from European sources, hence West African, Gulf and Indian Group l markets turned to renewed U.S. suppliers to fill the void.

As mentioned, Group II players were braced for the first large indigenous European supply source coming on stream. The new ExxonMobil unit in Rotterdam, with reported capacity of 1 million metric tons per year, will surely have a dramatic effect on Europes market. Since Dec. 1, 2018, European automotive engine oil standards continue to rise – oil companies marketing products that meet the European Automobile Manufacturers Associations ACEA oil sequence are required to hold ACEA 2016 approvals, further reinforcing the need for more highly refined stocks.

The market had already been primed with imported barrels from the same supplier from the U.S. and Asia, but what would be the effect of almost doubling current imported quantities in with local capacity? The market awaits the outcome.

At the end of 2018, Group II prices in Europe stayed higher than in most other global markets, and certainly the extended premium on Group l reflected a trend that was perhaps unsustainable. Lower feedstock prices contributed to European Group II being one of the highest returning markets in the world, and buyers were becoming evermore aware of this.

The Group III business was altogether different, having recovered from an oversupply of new production then being plunged into a short market when a major supplier in Qatar ceased production for around five months in 2017. Group IIIs supply and demand situation balanced, although announcements from China and the U.S. of new Group III plants may only increase the possibility of this market returning to being long and overweight.

Group III also faced an unusual two-tier pricing mechanism, where grades with partial slates of finished lubricant approvals from the latest sources in the Gulf, the U.S. and East Asia were pitched at prices meant to establish market share. Group III marketers with full slates of ACEA approvals could command premiums of more than $150/t, even when their oils come from the same source as products without full approvals, as is the case with the Sitra, Bahrain, Group III joint venture between Bapco and Neste.

As some of the major suppliers gradually move toward full approvals, this two-tiered market may change, although there will most certainly always remain an element of partly-approved or even non-approved Group III base oils that fill a particular need in the various markets.

2019 has only just begun, and time will tell whether forecasters and market readers will be correct in assumptions this year. The reckoning will possibly be in 2020.