Europe GIII base oils rebounds faster than expected

European Group III base oils demand has rebounded faster than expected over the past month amid a sharp pick-up in engine oil change requirements following the easing of lockdown measures across the continent.

The rise in demand caught suppliers by surprise. They had been focusing on managing their high inventories following the crash in demand in March and April. The shortfall between supply and demand has widened in response.

Engine oil demand has risen with the removal of lockdown measures across Europe included the reopening of service stations. The passenger car market is a key outlet for Group III base oils.

Following their reopening, some drivers have booked their vehicles for servicing before any possible second wave of Covid-19 infections and the reimposition of lockdowns.

Some drivers have also sought to get their vehicles serviced ahead of taking driving holidays in their own country or neighbouring countries over the coming weeks, rather than flying to more distant destinations.

A preference for private transport instead of public transport to reduce the risk of virus transmission is adding to demand.

The revival in engine oil demand contrasts with the slump in consumption in March-May as lockdown measures halted movement around Europe. The closure of service stations during the peak oil-change season exacerbated the drop in demand for finished lubricants.

Europe's new car sales fell by more than 41pc in the first five months of this year compared with last year. Passenger car production in key markets such as Germany fell by more than 60pc in May alone and by 40pc in the first half of the year. The slowdown in sales and production slashed demand for OEM-approved factory-fill lubricants.

Group III base oil sellers responded to the slowdown and build in inventories by cutting supply.

South Korea's base oil exports to the Netherlands and Belgium ground to a halt in May for the first time in more than a decade. Most if not all of these supplies were Group III base oils.

The planned shutdown of a Group III base oils plant in the Mideast Gulf for maintenance had been scheduled to end in first-half April, but was extended by several weeks. Exports from the unit only resumed in June, with the first shipment to Europe in early July.

Exports of Group III base oils from Russia also fell sharply during the second quarter.

Within Europe, base oils production at a key refinery was reduced in response to lower demand from March.

With demand suddenly rebounding, there has been a time-lag before supply could respond.

Group III base oil importers are now seeking to manage the supply shortage as they wait for the arrival of replenishment cargoes from Asia-Pacific and the Mideast Gulf. Production at the European plant is now ramping up slowly in response to the rise in demand.

Some suppliers have put customers on allocation or are not offering spot supplies until their shipments arrive. At the same time, some have sought to carefully manage a rise in supplies to avoid leaving the market with a surplus that would put downward pressure on prices.

European Group III base oil prices have risen in response to the tighter availability, gaining €30-40/t ($34-45/t) since lows in mid-June. Argus OEM approved Group III (a) base oil price assessments have risen more strongly than non or semi-approved Group III (b) prices. The premium of approved base oils over non or semi-approved base oils is around €60-80/t, depending on the grade.

By Catherine Caulfield