Europe base oil values strengthen during lockdown

European SN 150 base oil values surged relative to feedstock prices in April to their highest levels in almost three years. Firm supply-demand fundamentals earlier in the first quarter cushioned the impact on demand of region-wide lockdown measures from March.

But the relative price strength then left suppliers struggling for outlets later in the second quarter.

The premium of fob domestic Europe SN 150 over 2pc vacuum gasoil (VGO) averaged $422/t in March and then $436/t in April, the highest premium since mid-2017. The base oil premium rose after SN 150 prices fell by 12pc in the two months to end-April. Crude prices fell by 69pc during the same period.

Limited availability and firm demand for bulk Group I export cargoes in the first two months of the year left regional producers with balanced to tight stocks. The more limited inventories provided a storage buffer for unsold supplies that began to build from March and April.

More balanced supply fundamentals initially countered the impact of sliding base oil demand caused by the wave of coronavirus lockdowns throughout Europe. Those balanced fundamentals provided support for outright prices at the same time as feedstock prices were crashing.

Base oil prices in the US and Asia-Pacific reacted quicker to weaker feedstock prices, lower demand and building supplies. Besides a slump in domestic demand, the US market faced pressure from the closure of the arbitrage to move surplus supplies to Mexico, which has become the largest outlet for US exports. The Asia-Pacific market similarly had to contend with a slump in demand from India following its full lockdown from late March. That country is the largest importer of base oils in the Asia-Pacific region.

Suppliers with surplus volumes in US and Asia-Pacific then began to target other markets including Africa, India, the Mideast Gulf and the east Mediterranean. Europe and fob Baltic export base oil prices were increasingly uncompetitive against those supplies. But the manageable supply in Europe in March curbed the urgency to reduce prices. The steady prices also curbed the incentive for producers to cut output more sharply.

Full tanks in Europe and a growing supply overhang in April then prompted European refiners to slash prices to compete for export markets, but storage tanks in those markets were already brimming with supplies from the US and Asia-Pacific.

Europe's refiners struggled to sell to overseas markets in May as supplies grew. Refiners then slashed export prices to their lowest in more than a decade to spur demand. The effect has been to widen the discount of Europe export prices to domestic prices to the widest on record.

By Catherine Caulfield

SN 150 premium to VGO $/t