2023 Global Market Outlook: Base Oils
Introduction
Global base oil markets will continue to grapple with the loss of 1.4m tonnes of Group I capacity and feedstock shortages stemming from the Russia-Ukraine war. The combination created base oil shortages and swift price spikes in early 2022 that could repeat if demand is similarly strong in H1 2023. The EU will sanction import of Russian crude products on 5 February, leaving the region short on gasoil it needs. This will have ripple effects on supply in the Americas, Middle East and Asia as trade flows shift to fill those voids. About 3m bbl/day of global refining capacity comes online in 2023, but that will not be soon enough to meet winter gasoil demand after the Russian sanctions kick in. The conditions could tighten base oil supply and pressure prices. Supply concerns should alleviate toward end 2023 as refining capacity comes online to improve gasoil supply, while the base oils market anticipates Group II and III capacity in 2024 and 2025. Demand will be the wild card, possibly offsetting supply concerns if recessionary conditions ramp up.
US base oils markets start sluggish
US base oil supply is long against weak demand heading into 2023, but two major turnarounds in H1 should rebalance the markets.
Base oil demand fell in Q4 2022 because of ongoing lubricant additive availability constraints and seasonal destocking, and inflationary pressures and weak growth projections should continue to weigh on consumption through H1 2023.
Group II outages
US supplies are ample to start 2023, but this will correct to some degree with planned downtime approaching.
Two refiners accounting for a combined 32% of Group II virgin production capacity will perform maintenance in H1 to change their respective catalysts.
Excel Paralubes is expected to begin its maintenance in late January and it will last 55 days.
Chevron is then expected to conduct its 30-day maintenance at Pascagoula, Mississippi, in April.
Each refiner should be prepared to meet its customer obligations through the estimated outage periods, but spot material may be limited.
Each site delayed the work amid strong margins for middle distillates throughout 2022, which presents a possibility the maintenances could last longer than originally estimated.
Supply
Refiners have been maximising middle distillate production in 2022. This has translated to reduced base oil production, which is evident in US Energy Information Administration (EIA) data.
Lubricant additive availability also has been constrained all year, but has begun to improve, translating to higher product supplied.
Refinery capacity
The Russian/Ukraine war disrupted global gas oil markets with shortages that drove prices higher.
The phenomenon increased the significance of gas oil markets on base oil markets, and ICIS expects that gas oil will continue to affect base oil supply in 2023.
More than 3m bbl/day in additional refining capacity is coming online over the next year to alleviate refined product imbalances.
About 14% of that will come from refinery expansions in the US at ExxonMobil’s Beaumont, Texas, site; Marathon’s Galveston Bay site; and Valero’s Port Arthur, Texas, site.
However, the start-up of new capacity will not be quick enough for the start of EU sanctions on Russian gas oil on 5 February.
Europe will still be in winter at that time, potentially with a shortage of energy supplies, which will drive EU refiners to seek gas oil from other regions including the US.
Weak demand in base oil end-use markets such as finished lubricant could make short-term supply imbalances less relevant.
Group III
Most US Group III supply is imported from producing regions in Asia and the Middle East.
Refiners there have been prioritising the US market to distribute Group III material, and that is evident in import data from the ICIS Supply and Demand Database.
US imports are up by 11% through October compared with the same period in 2021. It is the highest volumes in at least five years.
The US is expected to remain a priority for Group III producers due to its standing as the highest-value region with demand steady to growing as lubricant makers continue to shift to higher-performance lubricants.
Exports
Exports slumped in 2022, down 4.3% from 2021, likely because supply improved and prices fell in other regions, drawing competition in Latin America for US refiners.
Exports to Mexico, the US’ largest export destination, fell by 35% year on year through October. It was the lowest volume of exports to Mexico since 2017.
Volumes were down to most of the major outlets, except for Colombia.
Demand
Domestic demand fell sharply in Q4, which is typical although some players looked to keep leaner-than-usual inventories on hand because of uncertainty in the new year.
Players are expected to restock, but it could be slower than usual as they gauge economic contraction.
Additive availability continues to improve, which should support demand to some degree.
Base oil prices
Downward price pressure ramped up through Q4 and continued into January with formal posted price reductions, depending on how quickly demand picks up.
Other factors will also be at play. Refiners continue to maximise diesel production, which will be somewhat supportive of base oil prices.
Group II N100 prices have trended downward in both domestic and export markets in Q4.
Declines were more pronounced in export markets as refiners cleared cargoes to achieve better balance - creating a $1.20/gal discount.
When EU sanctions on Russian crude products begin demand could rise and create firmer conditions. However, the market does not appear to be concerned yet.
Author:
Amanda has eight years of experience writing about and analysing US energy and petrochemical sectors. She has covered everything along the supply chain from the well-level productivity of US tight oil plays to pipeline infrastructure to the petrochemicals and refined products that make modern life possible.
Amanda splits time between analysing and assessing base oil and butadiene markets and helping to lead the ICIS Americas pricing team to produce weekly insight and pricing intelligence.
Before joining ICIS, Amanda worked for an upstream oil and gas consultancy and various Louisiana and Kansas newspapers. She has more than two decades of journalism leadership experience. Amanda also draws on extensive data-driven storytelling and visualisation experience to inform her work at ICIS.
European base oils market braces for impact of Russian oil products embargo
The European base oils market is approaching a pivotal moment for domestic production as sanctions on Russian oil products are set to begin in February 2023.
This could drive a tightening in Group I supply, which will likely have a knock-on-effect to Group II and III. However, lengthy availability and lower than expected demand fosters weak market sentiment for Q1.
Global economic concerns dampen export outlook
European export demand is likely to remain limited through the first quarter of 2023 and some players expect it to remain weak through the first half of the year.
The economic issues weighing on several parts of the world are impacting export demand for base oils. Countries like Nigeria and Egypt are facing problems securing foreign exchange and there is no sign when this will end.
Key export market Turkey had very minimal buying interest at the end of 2022 due to high inflation, a weak exchange rate and a cap on finance from several banks.
The economic situation in Turkey is unlikely to change significantly in the first quarter of 2023, and most Turkish sources say there is no economic uptick anticipated in the first half of the year.
There was enough availability to meet the limited demand in the fourth quarter of 2022 and there could be length in the first quarter if interest remains minimal.
But at the same time, a wide price gap between the export market and domestic market in Europe has led some sellers to prioritise the majority of their material for the domestic market.
If there is length in the domestic market, this material will then be moved to the export market, but current expectations are that the domestic market will be balanced in the first quarter.
There could even be signs of tightness in the domestic market amid the sanctions on Russian oil, which could affect base oils production, but this remains to be seen.
This could lead to some slight snugness in the export market if there is any uptick in demand.
Analyst view
Supply pressures caused by the Russia-Ukraine war have to an extent stabilised with the redirection of trade flows. Demand concerns, driven by the macroeconomic environment, continue to weigh heavily on market sentiment. However, the 5 February products embargo on Russia to Europe could spark a dramatic rise in gas oil cracks. When gas oil cracks rose in the second and third quarter of 2022 this raised base oil prices significantly. However, the more orderly move in February is likely to result in a more muted effect in the base oils market than seen in 2022.
Domestic supply hinges on oil products sanctions
Healthy availability of Group I base oils in the domestic and export markets led to prices falling in Q4 2022.
Domestic demand was particularly weak in December, as buyers aimed to keep inventories low ahead of the new year.
Purchasing activities were largely hand-to-mouth, also due to the expectation that prices would fall further.
Some refiners had surplus stocks to sell, and this drove a wide gap in relation to offers in December in the domestic market.
Uncertainty lingers over the market for Q1, with many expecting lengthy market conditions to continue, while some fear the effects of sanctioned Russian oil products could tighten the market in late Q1-Q2.
Concerns over base oils supply, feedstocks and energy costs are likely to dominate price discussions in 2023. Demand expectations have been rather steady so far, with the market balance more likely to be driven by supply conditions.
Group II follows Group I movements
The Group II market cooled off in Q4 2022, following the downturn for domestic Group I base oils.
Steady price decreases were seen in Q4, as competitive prices for Group I base oils placed pressure on the market.
Group II supply also improved in Q4, adding to the downtrend.
The influence from Group I pricing is likely to persist in 2023. However, there are some watchpoints on the supply side, as a number of major Group II planned turnarounds take place in the US market.
As a result of these scheduled maintenance outages, the European market could see fewer US imports in comparison to 2022.
Group III bucks trend, strong demand anticipated
The Group III sector has been bucking the trend of the rest of the base oils market, with firm prices and strong demand.
This is anticipated to continue in 2023, with a lot of lubricant blenders having switched to lighter lubricant mixes which require Group III material.
The 4cSt market was tight in the second half of 2022 and this is likely to be the case in the first quarter as well.
While some plants have returned from maintenance, demand is expected to outpace existing supply.
There is limited Group III production in Europe and the absence of Russian volumes has been felt in the market in 2022.
There is no clear replacement for these volumes and as such, the market, particularly un-approved material, is set to remain tight in the first quarter.
Logistical issues with vessels and freight costs from the US and Asia also plagued the market in the second half of 2022, but freight costs are starting to return to average levels and most logistical issues have been resolved.
These issues should not play a significant part in any shortages in Q1, unless there are any further developments.
The 6cSt and 8cSt markets are likely to be more balanced or even balanced to long, dependant on how much demand there is for the heavier grades in the first half of 2023.
Base oils are used to produce finished lubes and greases for automobiles and other machinery.
Authors:
Samantha Wright is a Senior Editor Manager at ICIS, covering base oils, polyethylene, polypropylene and EVA. Since joining ICIS in 2017 Samantha has covered a wide range of chemical markets as well as leading a number of data analysis and visualisation projects.
Eashani Chavda is a Senior Editor with over five years’ experience at ICIS covering petrochemical markets. Her current portfolio focuses on domestic base oils, methanol and oleochemicals. Over the years Eashani has covered a wide range of products including solvents, intermediates, and upstream petrochemicals.
Michael Connolly is the Principal Analyst, Refining, in the ICIS Analytics business covering the Refining industry and Oil markets. His role includes Supply/Demand database forecasting, price forecasting, analysing trends in refining and single client work. He has worked in the refining sector since 2001, both as a consultant and in refineries themselves.
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Asia base oils supply to increase, overall demand to recover
Asia’s Group I base oils spot supply is expected to lengthen from December after restarts at a couple of southeast Asian refiners’ units from their turnarounds.
A couple of Thai refiners had just restarted their Group I units in November/December 2022 from scheduled maintenance, with spot availability of spot SN500 and brightstock lots to resume in January.
Thailand and Indonesia are the main exporters of Group I spot cargoes in southeast Asia, though export quantities from Indonesia’s Pertamina have diminished this year due to robust domestic demand.
Spot availability of Group I material from Japan, meanwhile, would likely continue to be limited following the permanent closure of ENEOS Corp’s Negishi unit in October 2022.
Moreover, ENEOS Corp is planning to close another of its Group I units in Wakayama in October 2023.
ENEOS Corp has planned turnarounds at its Group I units in Kainan from May to June 2023 and Mizushima A from September to November 2023 respectively, thereby further curtailing supply.
Another Japanese refiner, Idemitsu Kosan, is planning to shut its Chiba Group I, II and III units from H1 April to end-June 2023 for scheduled maintenance.
For Group II, supply is expected to be longish in 2023 with no known major turnarounds in the region in the first half of the year.
South Korea’s Hyundai Oilbank Shell Base Oil (HSB) is currently running its Group II at 80% of capacity after it had switched to produce more gasoil due to poor base oils margins, and it is unlikely to ramp up its base oils production unless margins were to improve.
Most base oils refiners are able to switch between producing more of base oils or gasoil to a large extent.
Gasoil prices are highly correlated with upstream crude prices, while supply and demand fundamentals play a larger role in base oils price movements and are less correlated with crude.
A Chinese state-owned refiner is expected to continue exporting regular volumes of more than 10,000 tonnes per month of Group I SN150 and Group II 150N in H1 2023 due to sluggish domestic demand.
As for Group III, South Korea’s S-Oil is planning to take its Group III unit off line from early June to mid-July 2023 for scheduled maintenance.
Supply of South Korea-origin Group III 4 and 6cSt will likely remain tight in H1 2023, while 8cSt supply is expected to be in abundance.
Demand-wise, most countries are on track to recover as their economies and borders reopen from the aftermath of COVID-19 restrictions, albeit China may take at least a few months to start showing signs of any significant recovery due to the surge in infection rates following its gradual easing of restrictions.
According to ICIS demand analyst Jincy Varghese, the outlook for China’s automotive industry remains puzzling, as it is heavily dependent on consumer mobility.
China has also experimented with the ‘closed-loop system’ of production where workers live in on-site dormitories at the plant. However, it was suspended due to a lack of spare parts.
India’s automotive industry will face challenges as large portion of spare auto parts are imported from China. As a result, China’s emerging COVID-19 policies will determine the health of the region’s industry.
On the bright side, the downstream automotive sector is expected to see strong recovery in some countries such as Japan, with 2023 auto production forecast to grow for the first time in five years.
In India, import demand for base oils is expected to pick up in Q1 2023 as market activity resumes after the year-end lull.
Buyers would be spoilt for choice between competitively priced domestic products and import cargoes from various sources, including southeast Asia, the Middle East and the US.
Overall market recovery in 2023 would likely hinge on lingering global recession fears, geopolitical uncertainties as well as the crude oil price direction.
Author:
Matthew Chong is a Senior Editor at ICIS Singapore, covering the Asia base oils market. Prior to taking on base oils, he was in charge of the polyurethane (PU) chain of products in ICIS. Matthew also has several years of working experience in the financial industry.
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