European base oil prices could face upward pressure from tighter feedstocks, after EU sanctions on Russian oil products take effect in early February.
The EU will implement sanctions on all Russian oil products on 5 February 2023, which will cut an estimated 8mn t/yr of vacuum gas oil (VGO) and 800,000 b/d of diesel to Europe.
Restricted imports of Russian VGO could affect European refinery production as feedstock availability will tighten, which could in turn affect base oil output and support prices. Many European refineries have been running at near full capacity during the final quarter of 2022, after autumnal maintenances and strike periods ended. And, when the ban starts, they are likely prioritise diesel and other fuels, over base oil, if European buyers struggle to secure alternative sources from the Mideast Gulf, the US or China to cover their diesel requirements.
Other headwinds, such as rising energy costs, could also weigh European refinery outputs, leading to a reduction in regional base oil production.
Group II supplies steady
But while European Group I and Group II base oil output may be curtailed lower feedstock availability, regular shipments from other regions should help cover regional demand. And Group II supplies in Europe are likely to remain readily available in 2023.
Several Asia-Pacific suppliers have secured and increased distribution hubs to target the European market from nearby Turkey. Chinese state-owned refiner Sinopec has obtained the EU's Registration, Evaluation, Authorisation and Restriction of Chemicals (Reach) certification, which will allow for the producer to increase its exports to Europe.
Increased shipments of Group II should also come from the US. Several key producers in the US Gulf coast (USGC) cleared large volumes in the export spot market to balance their inventories before the end of the year. But exports from the country may slow in the first half of 2023 because of extended planned maintenance at two key USGC Group II refineries.
But limited vessel availability and high freight rates could hinder the flow of arbitrage shipments of Group II base oil from Asia-Pacific. Logistical constraints in 2022 prevented the flow of more than just a handful of arbitrage shipments from the region to Europe despite an open arbitrage window from March 2021. Argus' northwest Europe Group II prices rose to a record-high premium to Asia fob Group II prices in August.
Weak demand weighs on prices
European Group I and Group II demand continues to show signs of weakness through early 2023. Demand for these groups began to fall sharply in the fourth quarter of 2022 to well-below seasonal norms on slowing economic activity. Slower economic growth and demand for Group I and Group II, combined with fewer passenger car sales, could also dampened Group III base oil demand.
New car registrations in the EU in the first 10 months of 2022 fell to 1.3mn units, down by 17pc from a year earlier, according to EU car association, Acea. Key European markets Spain, France, Germany and Italy reported car registration decreases ranging between 10pc and 21pc between January-October 2022.
Rising inflation and higher costs of living have been key drivers for decreasing passenger car sales throughout the region. These conditions would be exacerbated during a global recession, which would curb Group III base oil demand.
But Group III supplies have been especially tight in Europe throughout 2022 following the removal of Russian semi-approved grades, which could support prices. Extended maintenance at two key refineries in the Mideast Gulf and Europe in the second-half of the year exacerbated the Group III supply-tightness in Europe.
