The markets are awash with theories (and theorists) proclaiming the ability to forecast at least the trends for all types of base oil during the course of this year and beyond. Some ideas and hypotheses are based on sound fact, for example the closure of a number of production units within mainland Europe, such as Shell Pernis and KPI Rotterdam. But a look behind and beneath these statistical realities reveals a wide range of other factors that may affect the European base oil scene over the next few years.

It is generally acknowledged that prices for all types of base oils will remain weak over the next few months. They may perhaps reclaim some value during the latter part of the year when crude and feedstock prices are forecast to rise. The assumptions continue with API Group I becoming less available during the year, following the closures noted above and with potentially two or three further closures to be announced. This group of base oils appears destined to become scarcer over the next few years.

The natural fillip is for blenders to convert to Group II and III base oils, with neatly accounted for replacement volumes of Group II coming on to the market from ExxonMobil in Rotterdam with 1,000 kilotons of new production and European neighbors in Saudi Arabia targeting markets with around 700 kt of Group II base oil. Meanwhile, major importers such as Chevron, Motiva and Far East producers will continue to make inroads in the Group II market within Europe.

As this industry is all too aware, transformation from Group I to Group II and Group III may not be the smooth ride that many are suggesting. Factors such as the open arbitrage between Russian Group I exports and Europe will continue and, indeed, may take up some of the slack left after Group I closures. The caveat is that these exports do not contain high volumes of heavy viscosity material such as brightstock. However, with Luberef in Yanbu also adding some 90 kt of brightstock to new production, European domestic and export markets must be considered as a home for at least some of that material.

Does this mean that with European Group I grades playing a smaller part in the market, the stage will be set for Group II and III to take over and control the pricing scene? With a potential over-supply of both Group II and III, at least through the next five years, competition will be fierce, and sellers trying to protect market share in this growing sector will use any margins to defend their positions.

Will this be a buyers’ paradise with a queue of Group II and III suppliers banging at the door to move stocks of product? Pundits think not because production and imports can be regulated to optimize market share without cutting margins to a point of self-destruction. In any case, some of these forecasts also postulate that the markets will have recovered and will be growing to absorb new production of Group II and III base oils.

Most theories about where the base oil markets are going have been built from production upwards, starting with crude oil, thence to feedstock prices and finally to added production costs. This progression should eventually lead to contribution and realization, thus determining the levels at which base oils would be sold.

Not many take heed that base oils are, in themselves, a raw material used in the production of finished lubricating oils. And their sale depends on the quantities of these end products required by consumers within various markets. Only by considering end-user needs can demand and forecast of base oil volumes be established.

European economies are in dire states, with the major league countries of Germany, United Kingdom and France showing little if any growth. The other EU nations are struggling to keep economic heads above water.

Due to this pan-European downturn, the demand for finished lubricants has fallen substantially over the past three years in volume terms, with automotive and industrial end users engaging reduced quantities of almost all types of lubricating oils. The demand vs. supply equation is, therefore, more than just a question of whether there will be enough Group I production to go around, or whether there will be an over-supply of Group II and III grades.

Demand has to be created by the ultimate end users who will use the final product in their ultimate applications. Until industrial output and gross domestic product start to grow within the major economies, buyers will continue to tread carefully when purchasing quantities of base oils.

The future for the European base oil arena has many possibilities, but none is written in tablets of stone, as some players imagine. At every turn and corner of the market, additional unknown factors can play a significant part, and all the corporate planning and forecasting cannot allow for these events. Only time will tell.

Editors Note: At Februarys ICIS World Base Oils and Lubricants Conference in London, Ernie Henderson of K&E Petroleum Consulting addressed the issue of base oil rationalization in Europe. The oversupply of Group I and II and low base oil returns creates the need for rationalization, Henderson said. He noted that complete and pending rationalizations include Shell Pernis and Harburg; Total Gonfreville; Colas Group, Dunkerque; Kuwait Petroleum, Rotterdam; and Lukoil, Nizhni Novgorod. In addition, the privatization of national oil companies in Central and Eastern Europe could lead to further base oil rationalization.