Whilst there is a definite interaction between various types of base oil, prices for different types have been impacted by different factors. Looking at each individually gives the best insight about what is happening.

Dynamics impacting Group I prices in Europe, North Africa and the Middle East are complex at the moment. Producers have been disappointed by returns for these grades compared to other petroleum products across the refinery slate. Poor netbacks, coupled with low demand and the option to produce alternative products such as low-sulfur diesel from the same feedstock, have led to base oil streams being cut back to a minimum. Some refiners are serving only in-house requirements and long-term contracted buyers rely on the supply of these grades to continue their production of finished lubes, or traders who are in a regular supply pattern to service receivers in locations such as West Africa.

Demand within the European arena has also been extremely poor given the grave economic conditions in countries such as Greece and Italy, and across the Iberian Peninsula. With base oil requirements falling in other stalwart nations such as France, Germany and the United Kingdom, production has been exceeding demand by a significant percentage. The only option available to refiners was to cut output from the lube trains, and to exist on reduced inventories with no slack in the system to cover any spikes in demand that might occur.

During August, demand suddenly began to outstrip availabilities, and buyers were forced to look either for different quality material to cover receivers needs or to buy from different sources. This was an effect not of increasing demand, but of falling availabilities.

Some buyers considered looking at poorer quality material from areas like the Baltic and Black Seas, but availabilities in these locations were also under stress and experiencing price increases due to tightened supply and hikes in export duties.

Instead of serving as lifelines, base oil traffic on the Baltic and Black Seas became yet another driver of price increases in mainstream Europe. Russian and Belarusian sources are not able to cover all types of requirements from the half-starved market, so a number of buyers have started looking at Group II base oils as one alternative.

Almost all of the Group II used in Europe is imported by suppliers based in the Far East or the United States. Supply bases in these markets have shifted to Group II and III, so whilst buyers in Europe were unable to tap them for Group I material, they could get plentiful quantities of Group II, which not only can be substituted for Group I, but can produce a higher quality finished lubricant with only a small increase in base oil costs and lower additive costs.

Low-viscosity Group II grades such as 150 and 220 neutral can be interchanged with low-viscosity Group I material such as solvent neutral 70, SN 100 and SN 150, and instead of upgrading Group I capacity to new Group II, some European mainstream refiners are looking at removing some parts of the their production and bringing in Group II grades from third-party suppliers. Others are seriously examining a process of either conversion or expansion to include Group II products on their slate, but such projects seem slow to move in Europe compared to activity elsewhere in the world.

Group II base oils are now also under upward pricing pressure, but due to completely different reasons. With massive investments being plowed into Group II projects and with feedstock values increasing, producers are ensuring that forecast returns on capital are satisfied.

The Group III market in Europe, the Middle East and Africa has undergone a quantum shift, with new production from sources in Bahrain and Qatar sending the market into oversupply. A market that was tight has become awash with availabilities, with a predictable effect on prices.

Europe was previously the region most revered by Group III suppliers due to the admirable returns available there. This has changed completely as European Group III prices fell, with local producers and importers clamoring to hang on to market share.

It has become apparent that many different factors have caused the European base oil market to react in the way that it has, and these factors are not typical. The interrelationship between all types of base oil continues, and connections in their respective prices remain. The fascinating thing is that to arrive at the same place – higher prices for most products – the various types of base oil have taken very different routes.