With closures and production cutbacks, the forecast is for Group I supplies to play a lesser role in the supply dynamics of Europe. Group II and III will become the new building blocks for lubricant production, with only a small part of the market using Group I production in areas such as marine and process oils.

With this game plan in mind, many refiners have chosen to pull out of Group I production, including Shell, with refinery sales in the U.K. and Germany, and the announced closure of Pernis in Rotterdam. Two refineries in Petit Couronne and Dunkirk, France, have lost, or are losing, base oil production. Others have closed light solvent neutral lines, substituting Group II low-viscosity grades in their place.

Other facilities around Europe from the Baltics to the East Mediterranean have curtailed production and have cut back the availability of Group I grades. Buyers are forecast to move to the new generation of base stocks mainly because of formulation changes to produce the higher specification finished lubricants required to reduce emissions and survive more severe operating conditions.

The capacity reductions have probably escalated over the last few years, and rumors abound of potential closures or at least limitations to Group I production. Adding to this somewhat negative scene was a severe downturn in crude and feedstock values during the summer of 2014 that saw base oil prices plunge to lows not seen for some 6 years. Some European economies are still in dire straits, with negative growth and extremely low demand for finished lubricants across all market sectors, from automotive to industrial end users.

As a result, the Group I market is at best tight and in some areas may be described as short. Buyers and receivers, both at home and abroad, are struggling to lay their hands on Group I oils, particularly heavier cuts that are popular with export destinations that apparently have become more dependent on European supplies. Refining margins on base oils are improving, and contributions from base oils are acceptable at this juncture. Given that prices for Group I have recovered well and will continue to rise in line with or ahead of raw material costs, refiners should be more than happy to churn out as much Group I as can be sold.

An interesting point is that Group I prices have not been aided or propped up by rising Group II or III levels. In fact the opposite is true, with European prices perhaps being driven by rising sales and availabilities of Russian exports from the Baltic and Black Seas. The expectation within Europe was that Group II production would be the benchmark against which all other base stock prices would be gaged. However, Group I still remains a dominant pricing barometer, due to either Europe not having indigenous Group II sources or other demand factors.

For example, West African markets that use Group I base stocks almost exclusively have lost some supplies from the United States and South America due to the upgrading of facilities to produce Group II and III. Also, areas such as the Middle East and India with expanding markets, and where climate conditions call for higher viscosity lubricants in many applications, are turning to European and Russian sources to supply the heavier Group I grades that cannot be substituted by Group II or III base oils.

Some European refiners are re-examining plans to cut back Group l, and some are even contemplating new investment or re-investment in new production of some of these grades. Units once marked for downsizing or even closure are now being given new life with replacement lines that may continue the production of Group I base oils for a long time to come.

On the other hand, some European refiners are unwilling to increase current production levels of Group I grades. They are concerned about the markets relative instability and that they could find themselves back in a situation where product is long with few market alternatives. This could result in prices being eroded and selling prices falling to unacceptable netback and contribution levels.

Comments by some refiners have disclosed a realization that some Group I units are beyond saving and realistically will have to be closed over the next 5 to 10 years. But other units could be granted reprieves. In fact, in one case, plans are on the table to build a new Group I facility, catering to the heavier cuts of neutrals, along with bright stock and wax production.

Some positive refiners are adopting the attitude that perhaps Group I will have a future. And with increasing limitations to sources of this type of material, the producers who stay the course may be in a prime position and may be able sell their production at a premium in years to come.

Given that ExxonMobil will join the European Group II club in the next couple of years and that future formulations for many types of finished lubricants will require Group II and III base stocks, there will still be another club that may become rather exclusive. This club, with fewer and fewer members and based mostly in Europe, will serve customers all over the Western Hemisphere where Group I production has been almost totally eradicated. Additionally, those remaining members may be particularly wealthy patrons.