Virus Infects EMEA Base Oil Industry

Chinese authorities mobilized to tackle the immediate medical emergency, having mishandled the crisis initially. People throughout the country were banned from traveling, prevented from going to work and even placed under quarantine. This had ruinous consequences on the Chinese economy with some industries affected more than others, including refineries and their processing plants, which began slow running or closed.

There followed a constriction of regional trade in Southeast Asia, as the infection spread, and falling demand for raw materials that included crude oil and feedstocks. (China accounted for almost 40 percent of the world’s production of petrochemicals and consumed more than 13 percent of its oil.) This triggered a fall in global crude prices, which impacted petroleum products and derivatives. At the ICIS World Base Oil & Lubricants conference in February 2020, attendance was noticeably down and discussions centered on the epidemic’s outcome and effects.

First reactions in and around European, Middle Eastern and African markets were muted, since raw material costs and production levels went largely unscathed by the evolving situation. Base oil production and trade seemed to be relatively unaffected by what was happening in Asia. Although fears that if the contagion spread, localized problems would be global have borne out.

The effects were different for the various types of base oil. Demand and availabilities remained positive for API Group l production in the EMEA region and Russia. This convinced suppliers to maintain prices, and in certain cases some sellers looked to increase numbers as a result of firmer crude and feedstock prices at the end of January. The typical pricing lag between crude and base oil kicked in, and it was not until the end of February that weakening demand started to affect price levels for regionally produced Group l base oils. This coincided with a growing number of infection cases spreading to countries such as Italy, Austria, France, the United Kingdom and Germany.

The Middle East and Africa were less affected at this stage, although a realization that should Group I base oil supply sources in Europe and Saudi Arabia be affected to the same extent as Southeast Asian markets, availability would fluctuate depending on whether or not refineries maintained output. Other factors also came into play, such as the ability of vessels to move cargoes without health restrictions being imposed at loading and discharge ports. 

The situation became uncertain. Some buyers and receivers acted quickly to lay hands on supplies while still available. Others elected to hold out for prices to weaken due to a fall in demand and therefore lower raw material costs. This split in perception maintained prices in an otherwise false market for some time.

Things were altogether different in the European Group II camp, since most supplies are either produced locally or are imported from the United States. Additionally, excess material which had been produced in Southeast Asia, particularly South Korea, but had no takers due to crumbling demand was targeted at buyers in any region that would accept volumes Europe, the Middle East and the U.S. 

As mentioned in this column before, the European Union set an import quota of 400,000 metric tons per year for imported Group II grades between 150 neutral and 600N but allowed tariff-free access to lower-priced sources with free-trade agreements with the bloc, such as South Korea, Canada and Singapore. These imports were anathema to local producers who were enjoying a high-priced, low-cost European market where netbacks and contributions for Group II were second to none. Group II prices started to weaken and remain in state of flux at this time.

Perhaps the greatest effects of the Covid-19 outbreak have been felt by in the Group III space, especially by producers of partly approved grades based in the Gulf consider exports to Southeast Asia to be key part of global market development. The curtailment of opportunities has focused Gulf-based suppliers’ minds on getting the most out of any available alternative market, and with Group III expansion a possibility in Europe and the U.S., their selling tactics had become more aggressive. But with a potential oversupply already hanging over the European market, prices may have started their slide already. 

Fully approved Group III base oils, most of which were produced in Europe, or at least “under license” in the Gulf, also came under pressure, primarily due to large quantities of partly approved material being offered into the market, although in Europe a certain amount of protection is afforded fully original equipment manufacturer approved Group III grades due to formulation commitments on finished lubricants.

Whatever the epidemiological state of play compared with Sars, H5N1 or even everyday diseases, Covid-19 has seriously impacted global markets and trade. This could herald the largest economic global disaster since 2008, as reliance on goods and services from those regions now suffering from the outbreak is yet to return to normality.

Although policymakers remain confident of a relatively speedy resolution to the fallout, base oil markets will take some time to recover.

Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in London, U.K. Send him comments or topic suggestions at pumacrown@email.com