My June column identified a number of key drivers that affect base oil prices and that can be counted on when forecasting future levels for all base oil types. This months emphasis is on where the industry has been over the last six months and where this historical cycle will take us into 2018.

The API Group I picture has changed constantly over the past few months, with prices starting to firm in January. The increases were not massive hikes in value, but were more gradual, showing a gentler curve than has often been the case. Group I numbers received a small but significant nudge almost every week, but not across all grades.

The interesting part is that once-freely available material, such as SN 150, became extremely tight throughout Europe. Russian exports could not alleviate this shortage due to simultaneous tight availability from those sources. Hence, SN 150 prices started to rise, and, on a number of occasions, levels for this grade rose above that of SN 500/600.

Demand for SN 500 then grew; however, production remained at normal levels. This, coupled with a series of turnarounds that converged on one another, suddenly made SN 500 tight. The end result was rising prices for this grade as well.

The oddball grade left behind was brightstock, which at one point during January and early February was priced below SN 500/600. This situation quickly evaporated, and brightstock reclaimed some of its intrinsic value.

Brightstock was expected to always be in demand and always command a considerable premium due to limited production throughout Europe. However, this was not the case for a number of reasons, primarily because brightstock was not in short supply, and demand was also low.

This was predominantly due to the fact that one of the largest export outlets for brightstock, West Africa, was literally closed to base stock imports. The Nigerian market was especially hard hit because of banking problems and the lack of access to foreign currencies. This, in turn, prevented banks from opening letters of credit, which the government decreed were to be part of the import process for all petroleum products, including base oils.

This situation eased between January and June, either because buyers found ways around the system or because some traders granted open credit on base stock supplies. Some banks can now access forex to open the necessary payment instruments to sellers.

With demand improving, brightstock prices have started to firm up and have established a modest, but acceptable, premium over the other neutrals. Greater availability is forecast for Group I grades during the rest of the year and into 2018; therefore, prices may dip during this period. Coupled with weak crude and feedstock prices, this scenario could start to erode the price gains of the first half of 2017.

Things have been different in Group II markets. Since Europe largely depends on imported Group II base oils, source markets played a major role in how the Group II scene evolved during the first six months. Far East and U.S. Group II markets were either balanced or occasionally tight, and producers were cautious about overstepping supply capabilities. Hence, they concentrated on serving their existing customer portfolio without too much emphasis on increasing market share.

European Group II markets are expected to undergo significant changes in supply dynamics when ExxonMobils new Rotterdam unit opens in late 2018 and when Luberefs Yanbu facility comes on stream later this year. While production at Yanbu may not be targeted specifically at Europe, its availability will undoubtedly cause a knock-on effect.

Thus, European Group II markets are about to experience a huge change in the way products are made available to a growing sector of the base oil market. But can that market absorb increased availability for these grades?

The bottom line for Group II within Europe could be that with greater availability and a growing market, prices may come under pressure. However, some pundits postulate that current imports and new production will be tailored to meet but not exceed market needs, supporting acceptable price levels in the marketplace.

Group III has been on a rollercoaster ride. At the end of 2016, new production was coming online at a rate never experienced before, with the result that only products with full OEM approvals were cushioned to an extent from a severe oversupply scenario. Prices were ultimately pummeled, not just in Europe but worldwide.

The unplanned Pearl plant stoppage in spring 2017 had a dramatic effect on Group III markets. The loss of a possible 1 million tons of Group III and Group III+ provided an opportunity for new production to fill the void, and markets returned to some form of balance and some grades even became tight.

The future remains cloudy for Group III markets, primarily because producers will find it increasingly difficult to sell product at acceptable margins. New production is planned in the Far East that will add a number of operations to the already saturated market. Russian producers have also announced new projects that will contribute to European trade.

Increased global availability of approved, partially approved and nonapproved Group III base oils will surely put pressure on prices in all market sectors. One possible negative of being a truly global market is that no matter where production is sited, Group III grades can be sold almost anywhere. This can create much greater competition around the globe.

Uncertainty for the future remains, but with investments in new base oil production already committed, it is without doubt among the more interesting of times for this industry.