Viewpoint: Europe base oils face oversupply

  • Spanish Market: Oil products
  • 15/01/19

The European market will prove vulnerable to global structural changes as Group I base oil producers maintain output levels and are slow to upgrade units.

The global base oil market faces unprecedented change in the coming years with rising premium base oil capacity, higher specification requirements for engine oils and the implementation of the International Maritime Organisation's (IMO) 2020 sulphur cap.

Group I prices face downward pressure in 2019 amid falling demand as more buyers switch to premium-grade Group II and Group III base oils. Spot Group I volumes could get a further boost in 2019 from a drop in supplies committed to term contracts compared with 2018. Producers attracted less demand for 2019 term supplies during negotiations at the end of 2018, although some negotiations have continued into 2019.

Many blenders lock in a large share of their requirements with term contracts. But these supplies have reflected an increase in volumes of Group II and Group III base oils in place of Group I. The availability of larger spot volumes is likely to cushion prices against higher-than-expected demand, unplanned maintenance or rising feedstock costs.

Scheduled plant maintenance should curb some spot availability during the peak demand season in the first half of 2019. Maintenance schedules are still being finalised. But several turnarounds in the Mediterranean region are already due to take place in the first half of 2019.

Portuguese refiner Galp 110,000 b/d Oporto facility will shut down in March for a month's maintenance work. The shutdown follows a 10-week shutdown in late 2018 for maintenance work. The earlier shutdown provided little upward price support because of weaker demand and sufficient market availability. Algerian state-owned Sonatrach's 170,000 b/d Augusta refinery will undergo six to eight weeks maintenance starting in the first quarter. The facility is home to the largest base oil unit in Europe, with a nameplate capacity of 782,000t/yr. In Russia, partial maintenance is scheduled to take place at Gazpromneft's Omsk Group I base oil plant from early March.

Persistent surplus supply could limit producers' leverage to raise European prices in response to higher feedstock costs, in the same way it did last year. Crude prices rose in the third quarter of 2018 to their highest levels since 2014. With producers unable to raise prices in response, base oil margins slumped. Some producers trimmed run-rates in response. A slump in crude prices during the fourth quarter of 2018 then triggered a sharp rebound in base oil margins, although they remained historically low. Any moves to cut output in 2019 in response to weaker margins should add price support.

Group I producers will prioritise keeping domestic prices firm by clearing surplus volumes through the export market. Such a move would impact the spread between domestic and export prices. A similar strategy in 2018 prompted a widening of the domestic-export spread from less than $50/t in the first quarter of that year to close to or above $100/t by the end of the year.

But overseas demand from more typical outlets like Turkey, India, the Mideast Gulf and Africa has been slowing. The trend reflects the uncompetitive price of European exports versus those markets' domestic supplies, and versus exports to those markets from other regions.

A repercussion of Turkey's economic crisis was sharply lower demand for Group I SN 150 and SN 500 supplies from Europe. European Group I base oil prices were also uncompetitive versus US Group II supplies and Asia-Pacific Group II/III base oils into India, Mideast Gulf and Africa. That trend has already extended into the start of 2019 and shows signs of extending longer. The prospect of the start-up of new capacity in the Asia-Pacific region and a relatively light round of global plant maintenance in 2019 is likely to sustain plentiful availability to move to other markets this year.

Bright stock was an outlier in 2018, mostly because of strong overseas demand from Egypt. EGPC's 115,000 t/yr Group I unit at the Alexandria refinery that was taken off line in October 2017 will restart in the first quarter of 2019. The resumption of supplies from that plant will follow shortly after the start-up of Luberef's additional 80,000 t/yr of new bright stock capacity in the Mideast Gulf in late 2018.

The Group II base oil market faces the prospect of pressure from rising supply. But tighter engine oil regulations and fuel efficiency requirements by European Automobile Manufacturers' Association (ACEA) are driving demand that will help to absorb this availability.

Falling prices in US and Asia-Pacific markets in late 2018 prompted a surge in discounted Group II exports from those markets to Europe. These added to a wave of supplies already moving to Europe from those markets. Asia-Pacific base oil exports to Europe exceeded 400,000t in 2018. US Group II exports to Europe rose to more than 850,000t in the first 10 months of last year.

Commercial sales of Group II base oils from ExxonMobil's new 1mn t/yr plant at Rotterdam are due to begin in first-quarter 2019. The new plant will quadruple current regional production capacity. Regional demand would need to increase sharply to absorb this combination of new regional supply and rising imports. One way to speed up demand growth would be a narrowing of the spread between Group I and Group II prices to encourage a switch to the premium-grade product in lubricant formulations.

Group II base oil prices were steady throughout 2018, prompting a steady widening of their premium to Group I prices. Their firm prices reflected rising demand for the product as blenders readied for implementation of the ACEA 2016 engine oil sequences at the end of last year.

The sequences outline a minimum standard for engine oils in Europe. Regular updates of those sequences include increasingly stringent testing and higher pass thresholds to ensure that engine oil formulations can withstand higher temperatures in combustion engines, increased use of biofuels and the push for fuel efficiency and economy. Formulations using Group I base oils increasingly struggle to fulfill those requirements. That difficulty in meeting these minimum requirements is set to gather pace as ACEA releases even tighter rules over the coming years.

Rising demand and steady supply helped to support Group II prices. This is in contrast to the slowing demand and plentiful supply that put growing pressure on Group I base oil prices from mid-2018. The result was an increasingly wide price spread between the two groups as their fundamentals disconnected.

Group II light-grade prices ended 2018 at a premium of more than $180/t to domestic SN 150 prices. That was up from an already high premium of around $100/t at the start of the year. Group II heavy-grade prices ended the year at a premium of more than $250/t to Group I SN 500, up from a $140/t premium at the start of the year. The trend reflected the growing structural disconnect between the two markets and the growing danger of linking Group II base oil supply contracts to published Group I base oil prices.

Group III prices are likely to remain mixed throughout 2019 as a result of diverging market fundamentals for base oils with and without original engine manufacturer (OEM) approvals.

The European market faced an increasingly regular and growing flow of Group III supplies from Russia and the Mideast Gulf in 2018. This rising supply of base oils without approvals kept spot prices in a narrow range throughout the year, especially for 4cst base oils. These supplies are likely to impact the Group III market in a similar way in 2019.

Prices for these unapproved supplies were competitive against supplies with approvals. They were also increasingly competitive versus Group II supplies. This prompted some blenders to turn to these supplies instead of using Group II base oils.

Group III prices rose strongly in late 2017 and early 2018 ahead of a raft of global Group III plant maintenance from March. Prices then trended lower after supplies normalised following the completion of that maintenance. But prices for Group III base oils with OEM approvals held increasingly firm relative to supplies with no or limited approvals. The result was a widening spread between supplies with and without approvals to as much as $250-280/t by year-end.

The Group III market faces a lighter round of global plant maintenance in 2019, compared with last year. South Korea's S-Oil will undergo planned maintenance at Onsan in March. But it has been stockpiling supplies at its European storage to cover term demand. Tatneft will also have maintenance at Nizhnekamsk in March, which will impact supplies of light grades for export.

European blenders have a growing number of supply options Group for I, II and III base oils in 2019. Global supply will add to downward price pressure for all three groups and mitigate impact of regional or global shorts. Price competition between groups and suppliers will be a key driver in the evolution of the European market as it switches from Group I to Group I/III base oils.


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26/04/24

High inventories pressure Brazil biodiesel prices

High inventories pressure Brazil biodiesel prices

Sao Paulo, 26 April (Argus) — Logistical differentials for Brazilian biodiesel contracts to supply fuel distributors in May and June fell from March and April values, reflecting higher inventories and a bumper crop of soybeans for crushing, which could increase vegetable oil production. The formula for the logistics differential of plants includes the quote of the soybean oil futures contract in Chicago, its differential for export cargoes in the port of Paranagua and the Brazilian real-US dollar exchange rate. It is the portion in the pricing linked to producers' margin. Negotiations for May and June started with plants seeking higher values to recover part of the losses incurred by unscheduled stops , the result of retailers' delays in collecting biodiesel. But the supply glut has not abated, leading to a drop in prices. With higher inventories in the market, fuel distributors stuck close to acquisition goals established by oil regulator ANP for the May-June period. Sales are expected to gain traction over the next two months, as blended diesel demand traditionally gets a seasonal boost from agricultural-sector consumption linked to grain and sugarcane crops. The distribution sector expects an extension of the current supply-demand imbalance, exacerbated by significant volumes of imported diesel at ports and lower-than-expected demand. The situation has generated concern among many participants, who see this trend as a potential sign of non-compliance with the biodiesel blending mandate. ANP data show that the compliance rate with the Brazilian B14 diesel specification dropped to 83.4pc in April from 95.2pc in March, reaching the lowest level since the 2016 start of monitoring. Non-compliance with the minimum biodiesel content accounted for 67pc of the infractions recorded during the period compared to a historical average rate of 47pc. The recent end to a special tax regime for fuel importing companies offered by northern Amapa state's secretary of finance should end a significant source of diesel price distortions and help rebalance supply in the country. Variations The steepest decline in differentials took place in northeastern Bahia state, where premiums for the period ranged from R600-830/m³ (44.35-61.35¢/USG), down from R730-1,020/m³ in the March-April period, according to a recent Argus survey. In the northern microregion of Goias-Tocantins states, the premium range also dropped by around R142/m³ to R300-535/m³ from R440-680/m³. By Alexandre Melo Brazil biodiesel plant differentials R/m³ May/June March/April ± Low High Low High Rio Grande do Sul 110 380 280 450 -120 Sorriso-Nova Mutum 50 340 220 350 -90 Cuiaba-Rondonopolis 80 405 280 450 -123 Northern of Goiás-Tocantins 300 535 440 680 -142 Southern of Goias 350 500 450 650 -125 Parana-Santa Catarina 150 450 400 480 -140 Bahia 600 830 730 1,120 -210 Source: Argus survey Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Lyondell Houston refinery to run at 95pc in 2Q


26/04/24
26/04/24

Lyondell Houston refinery to run at 95pc in 2Q

Houston, 26 April (Argus) — LyondellBasell plans to run its 264,000 b/d Houston, Texas, refinery at average utilization rates of 95pc in the second quarter and may convert its hydrotreaters to petrochemical production when the plant shuts down in early 2025. The company's sole crude refinery ran at an average 79pc utilization rate in the first quarter due to planned maintenance on a coking unit , the company said in earnings released today . "We are evaluating options for the potential reuse of the hydrotreaters at our Houston refinery to purify recycled and renewable cracker feedstocks," chief executive Peter Vanacker said on a conference call today discussing earnings. Lyondell said last year a conversion would feed the company's two 930,000 metric tonnes (t)/yr steam crackers at its Channelview petrochemicals complex. The company today said it plans to make a final investment decision on the conversion in 2025. Hydrotreater conversions — such as one Chevron completed last year at its 269,000 b/d El Segundo, California, refinery — allow the unit to produce renewable diesel, which creates renewable naphtha as a byproduct. Renewable naphtha can be used as a gasoline blending component, steam cracker feed or feed for hydrogen producing units, according to engineering firm Topsoe. Lyondell last year said the Houston refinery will continue to run until early 2025, delaying a previously announced plan to stop crude processing by the end of 2023. By Nathan Risser Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

EU adopts Net-Zero Industry Act


26/04/24
26/04/24

EU adopts Net-Zero Industry Act

London, 26 April (Argus) — Members of the European Parliament (MEPs) have adopted Net-Zero Industry Act, which plans to allocate funds towards the production of net-zero technologies. The act provides a pathway to scale up development and production of technologies that are critical towards meeting the EU's recommendation of net-zero greenhouse gas (GHG) emissions by 2050. This would include solar panels, electrolysers and fuel cells, batteries, heat pumps, onshore and offshore wind turbines, grid technologies, sustainable biomethane, as well as carbon capture and storage (CCS). The act is designed to help simplify the regulatory framework for the manufacture of these technologies in order to incentivise European production and supply. It also sets a target of 40pc production within the EU for its annual "deployment needs" of these technologies by 2030. Time limits will be instated on permit grants for manufacturing projects, at 12 months if the manufacturing capacity is under 1 GW/yr and 18 months for those above that. It will introduce time limits of nine months for "net-zero strategic projects" of less than 1 GW/yr and 12 months for those above. This is further complemented by the introduction of net-zero strategic projects for CO2 storage, to help support the development of CCS technology. The act was met with positive reactions from the European Community Shipowners' Association (ECSA), which said the bill will set the benchmark for member states to match 40pc of the deployment needs for clean fuels for shipping with production capacity. ECSA said the Net-Zero Industry Act will be instrumental in supporting the shipping industry to meet targets set under FuelEU Maritime regulations , which are set to come into effect next year. By Hussein Al-Khalisy Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

New technologies aim to boost SAF production


26/04/24
26/04/24

New technologies aim to boost SAF production

London, 26 April (Argus) — A likely rise in global demand for sustainable aviation fuel (SAF), underpinned by mandates for its use, is encouraging development of new production pathways. While hydrotreated esters and fatty acids synthesised paraffinic kerosine (HEFA-SPK) remains the most common type of SAF available today, much more production will be needed. The International Air Transport Association (Iata) estimated SAF output at around 500,000t in 2023, and expects this to rise to 1.5mn t this year, but that only meets around 0.5pc of global jet fuel demand. An EU-wide SAF mandate will come into effect in 2025 that will set a minimum target of 2pc, with a sub-target for synthetic SAF starting from 2030. This week the UK published its domestic SAF mandate , also targeting a 2pc SAF share in 2025 and introducing a power-to-liquid (PtL) obligation from 2028. New pathways involve different technology to unlock use of a wider feedstock base. US engineering company Honeywell said this week its hydrocracking technology, Fischer-Tropsch (FT) Unicracking, can be used to produce SAF from biomass such as crop residue or wood and food waste. Renewable fuels producer DG Fuels will use the technology for its SAF facility in Louisiana, US. The plant will be able to produce 13,000 b/d of SAF starting from 2028, Honeywell said. The company said its SAF technologies — which include ethanol-to-jet , which converts cellulosic ethanol into SAF — have been adopted at more than 50 sites worldwide including Brazil and China. Honeywell is part of the Google and Boeing-backed United Airlines Ventures Sustainable Flight Fund , which is aimed at scaling up SAF production. German alternative fuels company Ineratec said this week it will use South African integrated energy firm Sasol's FT catalysts for SAF production. The catalysts will be used in Ineratec's plants, including a PtL facility it is building in Frankfurt, Germany. The plant will be able to produce e-fuels from green hydrogen and CO2, with a capacity of 2,500 t/yr of e-fuels beginning in 2024. The e-fuels will then be processed into synthetic SAF. Earlier this month , ethanol-to-jet producer LanzaJet said it has received funding from technology giant Microsoft's Climate Innovation Fund, "to continue building its capability and capacity to deploy its sustainable fuels process technology globally". The producer recently signed a licence and engineering agreement with sustainable fuels company Jet Zero Australia to progress development of an SAF plant in north Queensland, Australia. The plant will have capacity of 102mn l/yr of SAF. Polish oil firm Orlen formed a partnership with Japanese electrical engineering company Yakogawa to develop SAF technology . They aim to develop a technological process to synthesise CO2 and hydrogen to form PtL SAF. The SAF will be produced from renewable hydrogen as defined by the recast EU Renewable Energy Directive (RED II) and bio-CO2 from biomass boilers, Orlen told Argus . By Evelina Lungu Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

P66 to sell German, Austrian retail business: Update


26/04/24
26/04/24

P66 to sell German, Austrian retail business: Update

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