Every new year unfurls itself in patterns both familiar and strange, and 2016 will be no exception, observes Geeta Agashe, principal of the New Jersey-based consulting firm Geeta Agashe & Associates. At a recent industry gathering in Dubai, she urged players to be on high alert for three trends that promise to have profound impacts on the lubricants marketplace:

First is the good news that Gross Domestic Product is seeing steady expansion worldwide. Economists at the World Bank and elsewhere are forecasting global growth rates of around 3 percent a year through 2022; emerging economies will surge past that, while advanced economies may see only 2 percent growth, Agashe told the ICIS Middle East Base Oil & Lubricants Conference in mid-October, before adding, The U.S. is a bright exception, and is showing solid growth of about 3 to 4 percent a year.

Second, crude oil prices have fallen below $50 a barrel and seem poised to stay in that territory for some time. Crudes fall into the $40 to $50 range has been pretty positive, Agashe said. With that, energy costs have come down everywhere in the world, and that means that consumers are driving more, consuming more, buying more.

Third, but more disruptively, additional new base oil supply is planned and will hit this already saturated market by the 2020 timeframe. Thats going to have an impact on how we blend lubricants, and where, and on our major trading routes, and so on.

Stakeholders, whether they be lubricant blenders or additive companies or base oil suppliers, might want to think about how these trends will affect them in the future, and plan to do things differently, she suggested.

Despite the generally favorable economic climate, there are still risks ahead for business, such as the potential for deflation in developed markets, and the possibility of a hard landing in China. What events could make the forecast turn sunnier? There might be a faster recovery in Europe, or increased agricultural production, Agashe mused.

For lube marketers hoping to broaden their geographic footprint, Agashe cautioned that its probably too late to wade into the famed BRIC markets (Brazil, Russia, India, China). These are very much saturated with lubricant suppliers. Theyre very competitive markets, and have their own strong national oil companies. And if youre not already in China… she shrugged. Well, good luck with that.

The next big lubricant volume opportunities will be the emerging markets of Malaysia, Chile, Poland, Philippines and Sub-Saharan Africa. The last of these, especially, is the last frontier for industry. Looking at the population and vehicle parc, its going to explode with demand in the future, Agashe predicted. So you need to have Africa in your plans, from a volume viewpoint.

In the short term, though, lubricant demand will bump along at its current, sluggish pace of about 1 to 2 percent a year in most regions. This is not exciting from a volume growth standpoint, she conceded. Fortunately, volume is only one side of the coin; viewed from the obverse side – value – the lubricant market has been rising all along.

Agashe went on to look more closely at global base oil supply, which she estimated to be about 37 million metric tons in 2015. In one respect, most base oil supply-demand is in balance, and from my viewpoint not a lot has changed in the global dynamic since last year, she noted. API Group I is in a balanced position overall, and ExxonMobil is still the largest merchant supplier of these stocks. However, there is tightness in the heavy viscosities and bright stock, and prices for these grades reflect this imbalance.

Group II and II+ are in an oversupply situation, especially for the lighter grades, she continued. Lots of light-vis Group III is also sloshing around the market.

Group IV base oils (polyalphaolefins) are the domain of big chemical companies like Chevron Phillips Chemical, ExxonMobil Chemical and Ineos Oligomers. Polyalphaolefins are pretty much in balance, although there is some tightness now in the high-vis PAOs that go into industrial uses like gear oils.

What could tip these balances? Although refinery closings may have slowed, the shrinkage in Group I capacity bears close watching, Agashe stated. The latest facility to join the Group I casualty list is the 4,700 barrel per day plant operated in Rotterdam by Kuwait Petroleum. That refinery is being sold and the new owner plans to shut down its base oil operation this year. Others slated to depart the Group I pool include Shells 7,100 b/d site in Pernis, Netherlands, and ExxonMobils 10,000 b/d plant in Beaumont, Texas.

Nevertheless, Group I is still the workhorse group, and accounts for about 50 percent of all base oil consumed worldwide, Agashe told the ICIS audience. Especially in the Middle East, Africa and some parts of Asia, we still see significant usage of Group I. So by 2020 or 2025, we will still see Group I around and dominant – but I do see the demand shrinking as engine oil everywhere moves to SAE 5W and other light grades.

On the other hand, she added, Group I demand is not shrinking at all for the heavy-vis grades, partly because we really dont have a well-priced substitute for heavy-viscosity Group I.

Todays oversupply is especially vexing for Group II and III suppliers, who see their prized light-vis cuts go begging for customers, Agashe pointed out. I get calls all the time asking Where can I send my 2 centiStoke material? she related. It can be pretty hard to place, although some is going out as process oils.

On a global basis, the dominant picture in terms of volume is one of stagnant lubricants demand growth – or worse – through 2020. Europe, for example, which once was a strong lubes market, is showing signs of decay. It seems that many countries there have lost their appetite for lubricants, Agashe said. This is due to a number of factors, such as industrial production moving away from the continent, and to driving habits, and to the type of cars being produced now.

At the same time, there are other openings that shrewd blenders and marketers may be able to exploit: We are seeing opportunities being created because of the type of lubricants being demanded. For example, passenger car motor oil viscosity is trending lighter all the time due to OEM needs, Agashe pointed out. In the past, only luxury automakers like Mercedes-Benz and BMW recommended lighter viscosity grades, but now even mass-market OEMs like Toyota and Honda have gone to SAE 5W for their cars no matter where they are sold. Theyre recommending the lightest grades for their cars anywhere in the world – including India and China, which are adopting these grades very quickly and increasingly have an appetite for 0W, 0W-20, 0W-8 oils. This trend favors Group II and III base oils.

Supply has grown a lot more quickly than demand, though, and currently the market is sitting in a glut of Group II+ and III stocks, Agashe said. Even so, suppliers will tell me they have not got a single barrel left to sell – its all sold out. I tell them, Well, yes, you can place your Group II and III barrels, but at what price? In fact, all this supply does find a home, but its often as a Group I substitute in places where you dont really need these molecules. And obviously thats having an impact on the price as well.

Another critical shift can be seen in the location of new supplies. The Middle East, which 10 years ago had zero Group II or III production, is now home to a large pool of premium base oil supply, from Bapco in Bahrain, Shell-Qatar Petroleum in Qatar and, launching this year, Adnoc in U.A.E. and Luberef in Saudi Arabia.

But, Agashe emphasized to listeners in Dubai, theres no native demand here for Group II and III, so it goes abroad. Middle East Group III merchants are wooing lubricant blenders in Europe and North America who used to be served by Asian Group III; they can have some transportation cost advantages in reaching these markets, too.

Between now and 2022, nearly 10 million tons a year of additional Group II and III stocks will come onstream around the world, radically skewing the regional balance. Back in 2012, almost 60 percent of the worlds Group III capacity was concentrated in Asia; by 2022, only 30 percent of it will be. The Middle East will hold another 30 percent, Europe about a quarter, and North America will muster a 13 percent share, Agashe pointed out.

What does all this mean to lubricant marketers in the coming years? Lubes will continue to be very lucrative – for astute marketers, Agashe assured. First, there will be some slowdown in volumes, but growth in profits. Second, backward integration may not be the winning differentiator, as it was in the past. And third, understanding the changing needs of OEMs and changing needs of the end-use customer will be the key to winning. Here, she stressed, you have to get close to the ultimate customer and understand what they want – not just what your distributor or quick-lube operator wants.

Synthetics is one value proposition that customers can appreciate, for example. No longer an exotic, synthetics are in a very competitive phase, with wide availability almost everywhere. They still can be a tough sell in some locales, such as Saudi Arabia, where drivers must change their oil frequently due to the punishing, dusty climate. Such customers will require close interaction with the lube marketer to make them aware of the benefits of synthetics. Not just on the automotive side, but also with industrial lubes, if you dont have a full synthetic in your product line now, you need to, Agashe insisted.

Being a fully integrated lube company is no guarantor of success either, Agashe went on. In the past, such integrated companies as Shell, ExxonMobil and Chevron were backwardly integrated. They owned base stock refineries, and also owned additive companies like Infineum and Oronite, and had their own blending and packaging plants. They were the only ones with access to high performance base oil and additive molecules, and this technology helped them to differentiate themselves and their products.

But since the 1990s, weve seen the rise of merchant base stock refiners, like SK and S-Oil and Neste Oil, and now a blender sitting anywhere in the world has access to the best base oil molecules, enabling them to compete with the Shells and Chevrons and other majors, she said. Technology today is no longer in the hands of a few – everyone has it.

Some lube marketers have differentiated themselves by allying with an automotive or industrial OEM, Agashe added. She pointed to the example of Valvoline, which was pretty U.S.-centric until it tied up with Cummins Engine; the two are now global partners, and Valvoline has much greater presence in India, China and elsewhere because of this relationship. Other alliances she cited are Petronas and Fiat, and Idemitsu and Toyota.

Turning again to base oil and additive marketers, Agashe reiterated that theyll find little low-hanging fruit in traditional markets. It has all been picked. You have to go to the exotic markets. And you also have to understand your customer, the lubricant blender. Its not only about price. Thats important, but it should not be the only thing you talk about with them. You have to understand the softer issues, and how you can help move that blender forward.

In 2016, the base stock, additive and lubricants industry will have a new yet familiar slate of issues to digest, Agashe summarized. The global economy is stabilizing, and crude seems likely to stay around $50 a barrel. New Group II and III capacity will swell base stock supplies and more than offset some Group I closures.

Most important, from a raw material sourcing viewpoint, is to recognize that new capacity is rising in the Middle East and elsewhere, which will have a profound impact on the market and traditional trading routes. Think about this now, and think how you can use this supply better in your own operations, Agashe concluded.