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Base Oil Report: Trends

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Base Oil Report: Trends
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2021 Will Be Marked by Pandemic and Politics

Almost everyone was glad to see the back of 2020, and in anticipation of improving public health conditions and a better trading environment, the base oil industry was one of the many sectors that welcomed the New Year. Hopes are pinned on COVID-19 vaccines, which should allow more freedom of movement and interaction of players around the globe.

In addition to crude and feedstock prices hardening over the past few months, other factors have influenced pricing on all types of base oil.

The pandemic’s effect on oil refiners has extended into 2021. Production of distillate transportation fuels has continued to be severely affected by lockdowns, and cutbacks to refinery runs have led to a shortage of vacuum gas oil feedstock.

In turn, this curbs the production of some grades of base oil. API Group I output is being affected to the greatest extent, further shortening an already tight market. With Group I grades moving short, pressure has mounted, and prices have risen dramatically over the past few months. 

Group II markets are faring a little better. Most Group II production has dedicated feedstock reserves, which have helped to maintain required production levels for these grades. However, as with Group I grades, demand has receded, destroying any hopes of expansion in sales in almost all regions around the world. 

Sources estimate that, through 2020 and during the first part of 2021, Group II demand fell by around 17% year-on-year globally, with East Asian regions being affected the least. Markets in Europe, the United States, the Middle East and South America have all felt the pinch when it comes to decreased usage of Group II products.

Group III markets have been hit in a very different way from the other base oil groups, with a shortage in prime markets caused by lack of availability. Some postulate that this is due to increasing demand for Group III base stocks. Others have pinned the cause of the tight market on refiners that have experienced production problems or have undergone major turnarounds amid forecasts of dwindling demand due to the coronavirus pandemic. Demand predictions and assumptions appear to have been miscalculated, causing a worldwide tightening of the Group III market.

Prices of course have risen accordingly, while suppliers and distributors in some regions have initiated allocation procedures to some customers.

Other than COVID-19, there have been some major events early this year that could have both direct and indirect effects on base oil markets. 

U.S. politics appear to have changed along with the presidential administration, and the final stages of Brexit have been completed in Europe. Having officially left the European Union on Jan. 31, 2020, the United Kingdom had 11 months of transition to complete a trade agreement before finally parting from EU terms and treaties on Dec. 31.

This transition time was used in its entirety to reach a trade agreement between the parting governments. From a base oil and finished lubricant perspective, the deal basically extends the tariff-free system for imports and exports of both controlled and uncontrolled goods between the two markets.

Whilst the effects of the split are being felt predominantly by the U.K., there are a few changes to base oil trade in the region. For example, from Jan. 1, the existing EU Registration, Evaluation, Authorisation and Restriction of Chemicals regulations were adopted into U.K. legislation. EU REACH continues in Northern Ireland, where this part of the U.K., along with the Republic of Ireland (which is still part of the EU), will be considered as a single market—at least for the next four years. 

A new chemical registration framework will come into place in the U.K. in April. Starting from Oct. 28, companies operating within the country, such as producers, blenders and traders, will have either two, four or six years to complete registration, depending on production volumes.

Base oils, additives and other associated chemicals all come under UK REACH authorizations, so the regulation will have implications for all involved in the lubricants industry.

Additionally, there are changes to immigration into the U.K., border controls have been amended, and the adopted trade and tariffs may be altered from existing models.

All of these aspects of Brexit are affecting base oil trade between the EU and the U.K., as well as the export of finished lubricants from U.K. manufacturers to customers based in EU countries.

Another aspect of the base oil trade that continues to suffer from the pandemic is the many new installations that were to be brought onstream last year, but which were mothballed until markets returned to some form of normality after the end of the pandemic.

This new production will continue to be held back, including plants in China (Hainan Handi’s 800,000 metric tons-per-year Group II and III expansion and Hebei Feitian Petrochemical’s 250,000 t/y expansion in Xinji), Russia (50,000 t/y of Group II and 240,000 t/y of Group III from Lukoil in Volgograd, along with 250,000 t/y of Group II from Rosneft in Novo-Kuibyhshev), and elsewhere. They will remain on the sidelines until market conditions improve.

Despite some temporary tightness, the market does not need further production of Group II or Group III base oils at this time. Present capacity outstrips demand by some 15%-18%, and catch-up may take some time—if demand ever reaches pre-pandemic levels again.

All is not gloom and doom, however. There are pockets of growth starting to emerge from the dark days of the pandemic. Working practices and trade may never be the same as in pre-COVID days, but a new normal will encompass the contributions of base oil production and supply, performing a crucial role on the global stage.  


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.

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