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Viewpoint: Tight supply supporting Asia base oil prices

21 Dec 2017 04:50 GMT
Viewpoint: Tight supply supporting Asia base oil prices

Singapore, 21 December (Argus) — Asia-Pacific base oil prices rose in 2017 from the previous year, supported by persistent supply-tightness. The exception was bright stock, which ended the year lower than at the start of the year.

The tightness reflected the impact of a heavy round of scheduled plant maintenance that affected Group I, Group II and Group III producers in both northeast and southeast Asia. Scheduled plant maintenance work in other regions such as Europe and US tightened supplies in those markets. The limited volumes supported firmer prices that closed the arbitrage to Asia-Pacific, adding to the region's supply tightness.

The unplanned and prolonged shutdown of several more plants compounded the tightness. The delayed restart of some plants following scheduled maintenance curbed further the market availability. Unlike the planned shutdowns, producers had no time to build stocks in preparation for the unscheduled shutdowns. Their need to fulfil term commitments forced them to tap supplies from other producers or markets. The moves exacerbated the tightness.

Most of the plant shutdowns were in the first half of the year. These coincided with the seasonal rise in demand in northeast Asia and southeast Asia. For producers with surplus volumes, expectations of higher prices prompted them to delay their sales until shortly before the shipments loaded. The moves enabled them to lock in higher prices but also added further to the spot-market tightness.

The price surge at the start of the year was led by Group II heavy grades. These already began their rise from October 2016 as Chinese buyers started rebuilding stocks earlier than usual. Fob Asia cargo prices peaked for the year at $845/t in early May, following a steady rise from less than $650/t in October 2016.

The higher prices far outpaced the rise in crude prices during the same period. The premium of Group II heavy grades to Dubai crude rose as high as $480/t in the first half of May 2017. That was up from less than $290/t in October 2016. It was also the highest level since June 2012. Crude prices were above $100/bl at that time, much higher than levels of around $51/bl in May 2017. The lower crude price magnified the profitability of the 2017 heavy-grade prices, which in May were more than 2.3 times higher the crude price. That was up from 1.6 times crude back in 2012.

Surging prices and tight supplies prompted blenders to seek Group I heavy grades instead. Prices for these supplies were at a discount of around $90/t to Group II prices at the start of 2017.

But supply of these base oils was also tight because of plant maintenance work in Thailand, Japan and China in the first half of the year. The tight availability and strong demand supported a surge in fob Asia SN 500 prices. Their discount to Group II N500 then narrowed to just $10/t by April.

Bright stock lags

Bright stock prices kept pace with higher SN 500 prices in the first two months of the year, as strong Chinese demand left availability tight. But a wave of supplies from southeast Asia, Mideast Gulf, Europe and the US then began reaching China at the end of the first quarter. Shortage turned to oversupply and prices began to slide.

Outright bright stock prices peaked for the year at around $915/t in March 2017. They then slumped to around $810/t by end-April, before bottoming out at around $740-750/t by end-June. At that level, they had fallen to a steep discount to prices in Europe and US. That triggered buyers to line up some arbitrage supplies to take to the Americas. The moves, combined with steady demand in Mideast Gulf and some stock replenishment in China, prompted a slow if gradual recovery in prices from the third quarter of the year.

The third quarter of the year also saw market price strength switch to light-neutrals from heavy grades. The trend reflected improving regional availability of heavy grades, combined with unexpectedly tight supplies of light grades.

The tightness partly reflected the impact of moves by some producers to tweak their output to make more heavy grades instead of light neutrals. Planned maintenance and unexpected production issues in Asia-Pacific in the third quarter added to the drop in supplies. Some surplus supplies were also being moved out of the region to other markets such as Europe and the US.

In Europe, Group III plant maintenance in the first half of the year and high Group I light-grade prices kept shut the arbitrage to move light-grade supplies to Mideast Gulf and India. Buyers in those markets turned to Asia-Pacific producers to cover their requirements. Exports from Asia-Pacific to the Mideast Gulf surged in the third quarter to a record high.

US storms tighten supply

The disruption to production in the US caused by several major hurricanes then compounded the tightness during the last few months of the year. That market focused on covering its own requirements, leaving scant surplus supplies to move to other markets such as Asia-Pacific in the fourth quarter.

Rather, there was a pick-up in spot shipments from Asia-Pacific to the Americas markets. This rise in demand kept the Asia-Pacific market tight at a time of year when it too typically struggles with surplus volumes. Crude prices at two-year highs provided further support.

Fob Asia Group II light-grade prices rose to more than $680/t by December, up from $570/t in August. Their discount to Group II heavy grades narrowed to less than $100/t, from around $200/t in early July. Their discount to European Group I prices also narrowed to less than $60/t by December, from more than $200/t in August. A major producer in southeast Asia raised its Group II light-grade prices twice in November. The increase was the first since March. It then raised its Group I heavy-grade prices in December, as well as its Group II light and heavy-grade prices.

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