Base Oil Report: Trends
During what has been an extraordinary year for the base oil industry, various factors have contributed to shortages of most grades, with Group I being affected first.
These shortages could have been foreseen. During the pandemic, refiners cut back runs for transportation fuels, while lockdowns curtailed passenger car use, and demand for many products disappeared. The airline industry came to a standstill, with fewer flights requiring supplies of kerosene.
Refineries faced downturns in the output of gasoline, diesel and jet fuel, such that availability of ancillary products, such as vacuum gas oil, were also curtailed. The subsequent shortage of feedstocks started to take its toll early in 2021, with absolute limits on supplies of raw materials to produce base oils and waxes.
A delayed but planned turnaround season for several Group I producers affected supply. In a normal turnaround scenario, refiners are able to plan inventories around production shortfalls during maintenance. Due to unforeseen demand this year, this was not always possible, creating limitations for spot and contract availabilities.
Yet another factor crept into the equation, with unseasonably cold weather during February affecting refineries on the United States Gulf Coast, particularly those in Texas. This cold snap shuttered some facilities, disrupting production and availability of base stocks for both domestic and international buyers. With force majeure being declared by producers in several instances, cover for routine demand came from alternative affiliate refinery sources in Europe and Asia, further shortening markets in those regions.
The first hint of a critical development in base oil supply came with Group l, where large parcels that would have been allocated to export markets started to dry up. Traders scrambled to find suitable availabilities for receivers in regions such as West Africa, the Middle East and India, where Group l grades remain popular.
Due to a tightening supply chain, Group l prices started to rise from their relatively low base. Prices increased by around $500-$600 per metric ton within a matter of days. Rapid increases became commonplace, propelling prices for solvent neutral 500 and bright stock to nearly $2,000 per ton.
European Group l domestic prices typically had been sold at a premium to export levels, this premium varying over time depending on demand from all parts of the market. This changed as Group l export prices vaulted regional and domestic levels, reversing a trend that many thought was etched in stone.
For some time, it appeared that Group II and III base oils would escape Group I oils’ fate, but that was wishful thinking. Blenders unable to access sufficient Group I grades started to look for opportunities to change over to Group ll. This increased demand for Group II stocks, most of which have dedicated feedstock supplies. The rising prices for Group II grades initially played catch-up with Group l levels, but April and May saw re-established prices for these base oils above Group I numbers.
Group III demand was rising during this period, too. Recovering European OEMs were looking for higher-specification passenger car motor oils. With ever-increasing pressure on emission controls, Group III base oils were set to provide solutions.
The problem with Group III supplies was—and still is—that there is limited global capacity because expansions and new construction of many Group III plants were postponed during the pandemic. Existing Group III production has been running full out this year, but this part of the market is still tight.
Other oddball situations emerged during this period. Some blenders remarked that they had contracted or arranged to buy a planned quantity of base oils to cover requirements for formulating finished lubricants. Having purchased specific quantities, blenders were shocked to find that buyers of finished products could not resell these oils at the higher prices and would not accept supplies of arranged contracted quantities.
Blenders stuck with extra base oils and additives then became traders, offloading unwanted quantities of all types of base oil back into the market at escalated prices.
Due to demand for any quantity of available material, blenders unable to lay hands on primary supplies were able to purchase from competitors, thus allowing them to fulfill commitments to their own buyers.
Increases in base oil prices have presented a varying set of problems, with intermediaries passing on increments between 200%-300%. Absorbing price increases has been impossible for blenders and resellers, with finished lubricant markets taking on a new shape.
Additionally, buyers or receivers have experienced further financial constraints when opening letters of credit using existing credit lines from banks. Product being sold during January and February into markets like Nigeria has now trebled in price, causing headaches for receivers and traders covering this market. Some buyers have opted to take smaller quantities, which has added to shipping costs.
Difficulties persist for traders in obtaining suitable availabilities from producers, and many have said that long-term commercial and personal relationships have been fundamental in accessing parcels of material for sales into export markets.
The only end in sight may be when refiners start to reboot production of feedstocks. This will not occur until demand returns for transportation fuels, which are not forecast to change until the end of this year.
It appears that base oil prices are to set to remain at the higher tariffs, although there may be small variations depending on how demand for these grades changes over the summer months.
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.