C O N T E N T S

BASE OILS

Group I

Group II

Group III
 S&D Outlooks - Base Oil Groups
GROUP I
Q4 2018 - Market Review
Supply
EUROPE
Supply of Group I base oils became more balanced in
Europe during the fourth quarter, despite talk of output
cuts at some refineries amid firmer upstream costs.
Prices had all experienced an element of downward
pressure during the quarter as a result, with talk of more
significant, but unconfirmed, decreases from some
pockets of the market. Brightstock remained the
tightest of all the three grades, with lighter grades able
to be replaced by other base oil groups.
Demand
EUROPE
Demand for Group I base oils in Europe was fairly in line
with expectations for the fourth quarter, with interest
tailing off as the end of the year approached. Most
buyers were likely to have covered their needs by the
first half of December, although there were few deals
reported. There had been an element of buyer
resistance to price levels in the market, with some buy
expectations significantly lower than levels more widely
heard in the market.
Q1 2019 - Market Outlook
Supply
EUROPE
Provided there are no significant unexpected outages
during the first quarter, supply of Group I base oils
should be balanced. Production slowed at some
refineries during the fourth quarter amid weak margins,
but output may have improved since crude oil prices
have been sustained at lower levels.
Demand
EUROPE
Group I base oil demand is likely to get off to a slow
start as the first quarter gets under way and players
return to the market. It is unclear whether the outlook
for Group I base oils demand will improve, with an
ongoing shift towards higher-numbered base stocks
being seen across Europe.
ASIA
Supply of light viscosity SN150 from Asia remained
limited, while southeast Asia-origin SN500 and
brightstock were relatively ample. A couple of Thai
refiners continued to run their facilities at full capacity
despite the spike in gas oil prices in October. A major
Japanese refiner had cut its base oils operating rate to
80% of capacity since October to produce more gas oil
due to more favorable margins of the latter at that time.
The Japanese refiner had yet to recover its base oils
production despite gas oil prices having retreated.
ASIA
Demand in Asia including India was lacklustre in Q4
2018, with buyers hesitant to stock up on cargoes amid
the plunge in crude oil and gas oil prices from their
peaks in October. Poor economic sentiment and the
ongoing US-China trade war further suppressed buying
appetite. Indian demand for Iranian Group I cargoes was
subdued due to uncertainties following the renewed US
sanctions in early November 2018, with buyers looking
more to Asia for their import requirements.
ASIA
Supply of lighter grade SN150 in Asia will likely stay
constrained as refiners are gradually shifting away from
Group I to Group II or Group III production. Supply of
SN500 and brightstock is expected to remain largely
stable. Southeast Asian refiners are likely to continue to
run their units at high rates, while a major Japanese
refiner is unlikely to ramp up its production amid tepid
demand.
ASIA
Demand in northeast and southeast Asia will likely stay
subdued in January ahead of the Lunar New Year in
early February. Downstream plants in China and Taiwan
will be shut for at least two weeks from H2 January
onwards. Demand will likely start to pick up only from
mid-February at the earliest.
US
Supply conditions for US Group I base oils are mixed. A
Q4 turnaround at one North American base oil unit kept
Group I oils more nearly balanced than Group II supply,
Increase
but light and mid-viscosity grades of both oils are
gaining length. Group I heavy base stock supply is
largely balanced.
Constant
Decrease
Mixed
US
Group I base oil demand was steady in Q4 for most
applications outside the passenger car motor oil
(PCMO) uses. PCMOs have transitioned away from
Group I base oil uses, but Group I oils continue to be in
good demand from marine and agricultural uses as well
as heavy-duty vehicle requirements. Group I base oil
demand in Mexico was good in Q4 2018.
US
Group I base oil supply is expected to remain steady in
Q1 2019. No turnaround events are known planned for
the first quarter. Low-priced crude oil feedstock versus
stronger priced vacuum gas oil (VGO) and fuels is a
factor for Q1 2019. Dynamics in these upstream sectors
could cause Group I producers to take crude to fuels,
offering a potential cutback in base oil production.
US
US Group I base oil demand is expected to remain
steady in Q1 2019. With passenger car motor oils
(PCMOs) almost exclusively the realm of Group II and III
base oils, the uptake in demand from this sector is
unlikely to impact Group I. Agriculture and marine uses
are expected to remain stable in Q1 for the Group I base
stocks, keeping overall demand largely stable for the
quarter.
 GROUP II
Q4 2018 - Market Review
Supply
EUROPE
Availability of Group II base oils in Europe was healthy
during the fourth quarter, with imports from the US and
Asia continuing to flow into the region ahead of the
anticipated start of commercial Group II base oil
production in the first quarter. US product tended to
dominate European supply during the fourth quarter,
with lower prices in the country originally expected to
lead to a downtrend in Europe, although this did not
materialise.
Demand
EUROPE
Demand for Group II base oils during the fourth quarter
was stable to weak, with buying interest slowing
towards the end of the year as players looked to
optimise their inventories. Slower demand had seen
some talk of significantly lower prices from some
pockets of the market, but these were largely
unconfirmed and did not correlate with price levels
heard more widely in the market. Demand had as yet
seen little impact from a change in efficiency and
emissions regulations which came into effect at the
beginning of December.
Q1 2019 - Market Outlook
Supply
EUROPE
Availability of Group II base oils is likely to increase in
Europe during the first quarter as it is anticipated that
the ExxonMobil Rotterdam refinery expansion will
begin commercial production of Group II base oils.
Meanwhile, import volumes from the US and Asia are
still expected to flow into Europe.
Demand
EUROPE
Demand for Group II base oils during the first quarter is
likely to be in line with seasonal expectations, although
changes in regulations and anticipation surrounding
the first commercial scale production of Group II
product in Europe could provide further momentum for
the shift to higher-numbered base stocks as the year
progresses.
ASIA
Asia’s Group II base oils supply dropped in October and
November as South Korean refiners – the main
exporters of Group II spot cargoes – had cut their base
oils production by 10-20% during this period. They had
switched to produce more gas oil due to more favorable
margins following the surge in gas oil prices. However,
most of these refiners have recovered full base oils
production by December along with the steep
correction in crude and gas oil prices.
ASIA
Group II demand for import cargoes in China was
especially weak because of abundant domestic supply.
Buying interest in northeast Asia outside China,
southeast Asia and India was also lacklustre towards the
year end in Q4 as buyers were hesitant to hold on to
high stock inventory. Buyers were further deterred by
tumbling crude values from their peak in October and
were mostly on the sidelines monitoring the market
amid poor market sentiment.
ASIA
Group II supply will likely lengthen further as refiners’
inventory levels are set to rise amid poor off take.
Increasing supply going forward will continue to weigh
on prices, with the India market especially hard-hit as
Asian suppliers will have to face stiff competition from
Middle East- and US-origin material.
ASIA
Demand in northeast and southeast Asia is unlikely to
see any significant improvement until after the Lunar
New Year in early February, as downstream plants in
China and Taiwan especially, will be closed for at least
one to two weeks from late January.
US
Group II supply gained length in Q4 in the US, mainly
driven by steady production rates versus sagging
export opportunities. Light, mid and heavy viscosity
Group II base oil supply was affected by these
conditions. This joined with low-priced crude oil to
sponsor significant posted price reductions in this
quarter.
US
US Group II demand sagged in Q4 2018 as export
opportunities were thin. Exports are a key balancing
factor for the US Group II base stocks, with heavy
contracted exports to Europe and South America
upholding this segment. Brazil’s requirements remain
curtailed on economics while European demand
fluctuated on new options for that market region.
US
US Group II base oil supply is likely to remain steady in
Q1 2019 as capacity utilisation rates are already high
and likely to remain at this state. Supply is unlikely to
increase because inventories are already high against
largely unchanging demand opportunities. Light and
mid viscosity base stocks are longer than the heavy Increase
grade.
Constant
Decrease
US
Mixed
US Group II base oil demand is expected to remain at
the Q4 levels, keeping constant into Q1 2019, but at
currently low levels. Group II demand is strong for the
passenger car motor oils (PCMOs) but the export
outlook remains thin for this quarter and that is the
restricting factor.
 GROUP III
Q4 2018 - Market Review
Supply
EUROPE
Supply of Group III base oils during the fourth quarter
was healthy, with unapproved product entering the
European market from Russia and Abu Dhabi, while
approved product largely entered Europe from South
Korea. Restricted logistics in Russia during December
amid railway-related delays may have affected Russian
supply. However, availability of unapproved product
tended to be comparatively healthier than that of fully
approved, with a wide price gap being maintained
between approved and unapproved material as a result.
Demand
EUROPE
Buying interest for both approved and unapproved
Group III base oils during the fourth quarter was fairly
stable early on in the period, but slowed towards the
end of the year as players looked to optimise their
inventories. There was talk of firmer prices for product in
October and November, but it was thought that lower
buy interest during December may have thwarted any
further upward momentum, although some approved
players saw firmer prices for late December/early
January volumes.
Q1 2019 - Market Outlook
Supply
EUROPE
Supply is expected to remain healthy during the first
quarter, although availability of unapproved Russian
product could slow as players are set to return to the
Russian market slightly later in January than those in
Europe. There are not thought to be any bouts of
maintenance planned for the first quarter.
Demand
EUROPE
Buying interest for Group III base oils is likely to remain
in line with seasonal expectations as players return to
the market as the new year gets under way. A shift from
Group I base oils to higher-numbered base stocks is
occurring within Europe, but it is unclear whether this
change in base oils usage will accelerate this year.
ASIA
Supply of Group III from northeast Asia remained
generally sufficient in Q4 2018 despite that a couple of
South Korean refiners – the key suppliers of Group III
material in the region – had cut their base oils
production in October and November as they had
switched to produce more gas oil momentarily when
gas oil prices rose to a peak in October. This was
because the market was flooded with lower-priced
Middle Eastern cargoes.
ASIA
Demand for northeast Asia-origin 4 and 6cst was
relatively better as compared to that of 8cst, which
explained the firmer prices of the former two Group III
grades. While some buyers in northeast and southeast
Asia with specific requirements had remained loyal to
South Korean material, the growing acceptance of
lower-priced Middle East-origin lots in certain
developing countries had led to northeast Asian prices
to drop.
ASIA
Supply from northeast Asia is expected to decrease as a
South Korean refiner’s unit will be going for shutdown
maintenance in March. Meanwhile, the supply of Middle
Eastern cargoes is expected to remain largely the same,
with no major disruptions in production expected.
ASIA
Demand for northeast Asian-origin 4, 6 and 8cst will
likely be stable in January ahead of the Lunar New Year
in early February and then start to pick up from
mid-February at the earliest.
US
“Group III base oil supply increased in Q4 2018 as the
impact of several new importers added to production
from new entrants to domestic Group III production.
Group III posted and domestic market prices reduced
during the quarter because of supply increases amid
competition between domestic and import producers.
Increase
Low-priced crude oil was a factor in price reductions
because of competition with Group II oils.”
Constant
Decrease
US Mixed
Group III base oil demand continued to rise in the
fourth quarter 2018, driven by ongoing increased
demand lighter premium oils. This trend is now an
established move in the passenger car motor oil (PCMO)
sector, driven by regulations that require the use of the
lighter oils. Stronger demand for Group III base oils
encouraged more imports as well as establishing a tier
of domestic North American production.
US
Group III base oil supply is likely to continue to increase
in Q1 2019 as one importer is adding a storage tank and
continues to gain foothold in the US market. Traditional
importers continue to meet contracted requirements
while one newer importer has established its
certifications and is now competing well with
traditionals. North American domestic production is in
an uptick, adding to the growing supply of Group III oils.
US
“Group III demand continues to increase. The demand
increase is being driven by the need for the lighter base
stocks for newer engine designs for the key passenger
car motor oil (PCMO) sector. This trend began in 2017
and continues to be a global demand driver for the
Group III base stocks. OEMs (Original Equipment
Manufacturers) continue to push for lighter PCMO oils,
with even 0W30 oils now required in some regulations.”