Base Oils Outlook Now and Later
The world’s base oil markets have reached a critical junction. With the option to go down any number of paths, the decisions made by refiners, producers, traders, distributors and blenders of finished lubricants will affect the direction and progress of the base oil scene for years to come.
The global base oil scene has been subjected to the most onerous period in the history of the industry. Having weathered a pandemic, which was accompanied by lockdowns and government restrictions on movements of goods in many countries, the industry experienced a downturn in demand for almost all consumer products. This was followed by an unprovoked invasion of Ukraine by Russia, which has led to a European war that has no end in sight.
Sanctions imposed by Western allies, such as the EU and other likeminded nations, have led to inflated energy costs. When added to the COVID-induced global recession, the base oil industry is looking at the perfect storm.
Inflation has reared its ugly head far beyond any forecast. Some predict that inflation will keep rising in major economies, like China, the United States and Europe, to levels not seen for some time. Some forecasts hover around 20% year-over-year. With wages and salaries not keeping up with these levels, real-time poverty is becoming an issue for many in major global economies.
There are signs, however, that inflation has peaked in some countries, like the U.S., and that levels will start to fall back to targeted objectives over the next few months. But some pessimists counter that only a temporary relief is happening and that another surge in inflation may be looming.
Not all parts of the oil industry have been negatively affected by inflation, COVID and the Ukrainian war. Demand has been rising for road fuels like diesel, and demand is also returning for aviation fuels and gasoline. With stronger diesel margins and weaker base oil margins, refiners worldwide are moving to produce middle distillates in favor of base oils and other derivatives, as refining margins have been squeezed on specialty products, while fuels and middle distillate margins have remained buoyant.
What does this scenario mean for base oils going forward?
With rising raw material costs, rising wages and mounting interest rates, the outlook is dire for many sectors, including the base oil industry. Fixed costs are no longer written in stone, and variable elements—including energy, wages and insurance along with integral basic material costs—are all on the up, with no end in sight to the inflationary spiral.
Demand is retreating for finished lubricants, with many industries cutting back production of goods. Transportation of goods is being hit by both lower demand and local and national strike action in which disgruntled employees and board directors cannot agree to wage settlements. This has led to increased frustrations and negative relationships between workers and employers.
Base oils are expected to be greatly affected by all the above. The industry must accept that with falling demand and poorer returns, the longer-term outlook for base oils needs to be revised accordingly. Monetary decisions taken by many producers to build new facilities or to reinvest are being questioned, with some of the more recent projects being mothballed until capital expenditure and running costs can be justified in an uncertain marketplace.
Going into the fourth quarter this year, turnarounds and planned maintenance for base oil plants are being considered to curb the quantities of base oil flooding the market. Several M&R projects are being discussed, with many producers looking to stage these events sooner rather than later.
Will these actions lead to another dearth of material similar to what happened earlier this year in Europe, with Group l base stocks moving short and prices rising to all-time highs?
The perceived answer to this conundrum is that the situation will not recur, and global cutbacks in base oil production will enable available material to fit the demand profile. This scenario remains to be proved.
The forecast outline for base oils remains that Group I will continue in decline with further closures of refineries and base oil plants in Europe and Asia-Pacific. This is not easy to spot, since there are large areas of the globe where Group I demand appears to be rising (South and Central America). Meanwhile, North America, Europe and Asia-Pacific will continue to progress to higher specification base oils with Group II and Group III.
The supply scene is not simple, however. Many regions—such as West Africa, East Africa, MEG and India—are still heavily dependent on Group I base stocks. These oils must be sourced from somewhere, and those producers sticking with Group I may identify these supply opportunities as a bonus.
Looking toward 2023 and beyond, there are more unknowns than there have ever been. Forecasts have been ripped up and revised, then revised again. This appears set to continue, with factors out of most players’ control affecting supply and demand scenarios with frightening regularity.
However, throughout the past couple years, the resilience of the industry has been commendable, with all those engaged endeavoring to make the situation work. The future of the lubricants industry is assured, and supply of base oils is persisting, albeit by adapting and reforming to manage the infinite number of variables being thrown at the market.
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 pumacrown@email.com