Base Stocks

Base Oil Outlook


Base Oil Outlook
© Atlas Illustrations

Global base oil markets are looking mixed, with Asia showing greater supply of all types of base oils. Meanwhile, Europe and the Middle East are overcoming shortages, particularly for Group I. The United States remains tight, with shortages of all grades as refineries catch up on inventory replacement after severe weather hit the Southern states earlier this year.

This scene has altered arbitrage openings. In the first part of 2021, Asian suppliers had difficulty meeting rising demand after the COVID-19 pandemic began to fade. At that time, demand in Asia was being met by European stocks. Now Asian supplies are coming to the rescue of European and U.S markets.

In Europe, Group l production is about 75% of total base oil output, which took a toll when the market started to shorten up as demand faltered for transportation fuels. Refineries cut run rates to prevent an overload on inventories of mogas, kero and diesel. This resulted in a shortage of feedstocks for base oil and wax, which shortened the market to the point that buyers found difficulty covering basic requirements to produce finished lubricants. 

Meanwhile, several prime refining sources went into turnaround, often for a month or more. This exacerbated the already short market. Group l supplies were rare and expensive, particularly for heavier viscosity grades, like solvent neutral 500 and bright stock. 

Around this time, Europe saw a reduction in imports of Group ll base oils due to weather-generated problems that left the U.S. domestic markets short of material. U.S. refineries focused on restocking their local markets instead of export sales. 

The lack of flow of material from the U.S. started to infringe on the European Group ll market, which accounts for only 11% of total European base oil production. This tightened supplies of these grades to a point where imports from Asia had tobe considered to fill the gap in the supply chain. Fortunately, Asian sources were emerging from the COVID-induced nightmare, and product from that region became available for export to the Middle East and Europe.  

Group lll markets hit similar problems, with production from all sources maxed out. As demand rose in Europe and the U.S., this sector of the market became extremely tight. Furthermore, two major producers in Europe went into an extended maintenance schedule, invoking allocation programs and curbing all spot business. In July, many suppliers had no availability of 6-centistoke Group lll product, which is the most-used grade throughout Europe. 

The possibility of increased production from a Russian refiner had yet to be launched, and it was set to produce only a 4-cst grade. While the increase in production was significant at 47%, this extra availability of Group lll hardly scratched the surface of the dearth of the Group lll market. 

These developments led to huge price increases. While the starting point was on the low side, price levels escalated at record rates. Some Group l levels rose by $200 in one week, and these price movements continued over several months. Prices eventually reached their zenith. Those levels were retained for May and June but began to show a modicum of weakening in July as greater quantities of material became available at the end of the Group l turnaround season.  

Price volatility is challenging in the best of times, but with COVID surges in such regions as India and Europe, price variations became a blender’s nightmare. Contract deals for finished lubricants had to be renegotiated.  

To avoid price volatility, other petroleum products are hedged and stored for longer terms. This is impossible with base oils due to specification variations and overall smaller quantities of material being traded. Thus, the base oil scene has become risk intensive, with a number of small and medium blending operations disappearing from the stage in all regions.  

Availability of base oils has become the major driver of prices. As more product has become available, prices have drifted downward. In some instances, where domestic markets are down or extremely quiet, producers that rely on local sales have resorted to export tenders to move material out of storage. While this has been welcomed in export markets, oddball sources and voyages have been initiated to accommodate these trades. Such has been the case of the national refiner in Turkey, where three tenders for nearly 20 kilotons of base oils were issued from April through June.  

Prices in the fourth quarter will be lower than in June, according to forecasts. Seasonal slowdowns will kick in, and supply availabilities are expected to improve for most grades. By the end of this year, global prices are expected to be lower by some $300 per metric ton than in June. 

Regionally, there may be differences, with Asia leading the way to lower prices and greater availability of all grades. Europe may remain relatively firm, with increasing demand following vaccination programs. European prices are expected to drift downward at a slower rate than those in Asia and the Middle East. U.S. markets may be the least responsive to lower levels, since the hurricane season is predicted to be particularly fierce.     

The future is far from certain, but base oil business will continue, albeit in a different manner. The pandemic has altered means of conducting trade, and while it is possible to make assumptions and assessments based on known facts, geopolitical events will occur and breakdowns and outages at refineries will happen.  

Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in London, U.K. Send him comments or topic suggestions at

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