European base oil prices face continued downward pressure in early 2024 as weak demand and a surplus overhang look set to persist.
Lacklustre buying interest has been the main factor weighing on prices in the past six months, especially for the Group I market, outweighing the effects of supply, competing fuels and feedstock values.
Group I fob domestic SN 150 spot prices in Europe fell to $1,010/t in the third quarter, down by 6pc from the previous three months, according to Argus assessments. Group I demand remained muted in the fourth quarter and spot prices extended their decline. Prices are poised to remain weak until blenders clear their finished lubricant stocks, which are uncompetitive on a global scale.
On the supply side, European producers have been prioritising competing fuels such as diesel, targeting higher margins, and this has constrained base oil output. Prolonged maintenance at Italian firm Eni's 600,000 t/yr Group I refinery at Livorno also cut an estimated 230,140t from the market from April until September this year. But this tightening of supply was outweighed by weak demand.
Constraints on buying capacity in key markets has put pressure on European export prices despite the limited availability. Issues with payments and access to lines of credit throughout 2023 has restricted demand for European product from west African buyers. Meanwhile, Turkish blenders looked to more competitively priced Russian supplies as output at the country's sole Group I refinery was sporadic and high inflation hampered purchasing power.
European fob export prices for SN 150 held an average premium of $286.67/t over fob Black Sea volumes for the same grade in December. The average for December for the three years prior to the EU's embargo on Russian oil products was just $91.67/t.
Spot Group I prices are on course for further pressure in 2024, underpinned by a relatively light refinery maintenance programme in Europe, a weak economic outlook and continued growth in electric vehicle sales.
Supply surplus
Europe's Group II spot prices are also falling on weak demand and a regional supply surplus. But Europe still maintains a global premium to Asian and US exports of $335-520/t for light and heavy grades.
US sellers are clearing excess volumes after the Mexican government announced a ban on base oil imports on 24 October to deter lighter grades being used for the fuel extender market. These volumes are currently targeting Indian buyers and competing with Asian exports.
Meanwhile, European Group III spot prices began an uninterrupted fall from early April, but they maintain a global premium of $485-505/t over Asian and Mideast Gulf volumes at at $1,693/t for 4cst on an fca northwest Europe basis. Surplus volumes have consistently targeted European buyers and suppliers discounted to free up tank space in the fourth quarter.
Falling prices in the US following a weak driving season, an autoworkers strike and inventory drawdown have kept Europe as the most attractive market in terms of pricing. Blenders are looking to limit term volumes in 2024 and will rely more on the spot market on the expectation that surpluses will persist.
Supply could tighten in early 2024 as Malaysia's state-owned Petronas' starts a 50-day maintenance programme at its 280,000 t/yr Group II and III plant in Melaka in January and SK Enmove carries out work for a month at its Ulsan plant in South Korea from mid-March. Any rebound in US demand as blenders look to replenish stocks in the new year could support spot prices and incentivise sellers to pivot arbitrage flows away from Europe.
Another factor that may tighten Group III supply and aid price recovery in the early part of 2024 is the fallout from the recent attacks on shipping in the Red Sea by Yemen's Houthi rebels, which have led to disruption of vessel movements through the Suez Canal. Some shipments from Asia-Pacific and the Mideast Gulf have been diverted around South Africa, adding an estimated 20 days to voyages.
