The base oil market faces the impact from a wave of new plant start-ups in recent years, with the increased supplies to weigh on future prices.
Price movements for base oils have been largely supply driven. Disruptions from refinery maintenance, run cuts, nature-driven incidents and other factors have been the key component for base oil price fluctuations. Demand for the lubricant feedstock, while a crucial price determinant, is typically steadier. Demand, growing by about 2pc/yr globally, continues to be a function of manufacturing, industrial and transport activity, while there is also seasonality in base oil demand.
Yet structural supply developments will likely weigh on base oil values over the coming year. Plant closures are expected to support Group I values. Rising production capacity will put more downwards pressure on premium-grade prices.
Permanent plant closures since 2017 have slashed more than 2mn t/yr of production capacity, mostly Group I base oils. Key plants that have ceased operations include Galp in Portugal's Porto, TotalEnergies in France's Gonfreville, Sapref in South Africa's Durban, Shell at Pulau Bukom in Singapore and Eneos at Japan's Negishi. The latest to shut is the Eneos refinery in Japan's Wakayama, ending operations in October 2023. The Group I plant had a production capacity of 360,000 t/yr.
But new plant start-ups and expansions since 2017 have added more than 12mn t/yr of nameplate capacity, mostly Group II and Group III base oils. Key plants that have started operations include Luberef in Saudi Arabia's Yanbu, ExxonMobil in the Netherlands' Rotterdam and Chinese producers Hengli Petrochemical in Dalian and Hainan Handi in Hainan.
The contraction in Group I and expansion in Group II and Group III production capacity comes as stricter emissions standards and engine oil specifications come to the fore. Group II and Group III base oils are better suited for these requirements.
The base oil market continues to be structurally oversupplied. Supplies of premium-grade base oils have increased at a faster pace than demand. But this rise in production capacity has yet to be fully reflected in the market.
New plants typically require a period before production output and product specification stabilises. This varies across plants, depending on the refining technology adopted and the feedstock used. It can take several years before production fully stabilises.
Base oil refineries also face additional pressure to operate at optimal levels. Competing fuel values remain relatively high. This is boosting the attractiveness of alternative fuels production.
Chinese slowdown
Slower than usual activity in some regions, like China, has prompted more refiners to keep run rates low to better manage inventories. Many refineries in China are not operating at optimal levels. Several producers are instead running close to or below 30pc.
But the price pressure from any plant closure is more immediate. Group I base oil refiners are, generally, operating at higher rates. Group I demand is also steadier because of their use in industrial, heavy-duty and other niche applications.
The premium of Group II over Group I base oils has narrowed in Asia, the world's largest base oil production region. Group I base oils have been priced at a premium to Group II supplies in some cases. Lower Group II price premiums will likely be more common in 2024.
New production capacity will alter regional trade flows. Most new start-ups have been in China that has been a net importer of base oils. The rise in domestic production capacity will boost availability among regional refiners that had once prioritised China.
