Argus Media
Base Oils Outlook for the European Market
European Group I export prices are expected to be lower at the end of 2017 than at the start of the year, according to the Argus Base Oils Outlook published in February 2017. Such a trend reflects the sustained pressure on base oil prices due to oversupply in the global market.
There has been in recent years a mismatch globally between start-up production and plant closures. Global net production rose by 5mn t from 2014 to 2016. New bright stock production from the Mideast Gulf is expected to start in the third quarter of 2017. Without additional plant closures and run-cuts to clear the supply overhang, prices are expected to be under pressure in the medium term, especially during periods when seasonal demand is weak.
European prices are projected to trend upwards in the first half of 2017, supported by a pick-up in seasonal demand, limited supplies and rising crude prices. Steady buying interest from Latin America and Africa is also expected to provide additional support to prices. But US Group I refiners are likely to provide strong competition to European refiners for those price-sensitive markets. We forecast US Group I export prices to be at a discount to European Group I export prices for the remainder of the year. Any moves by European producers to respond
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to this price competition will likely result in even lower actual prices than currently projected by the forecast.
European export volumes could be curbed further by the weak Euro, which is increasing the cost of importing base oils into Europe from other regions. The higher cost encourages European blenders to rely more on domestic supplies instead where possible. The Euro has nudged down from the 1.37 USD/ Euro level in early 2014 to 1.06 USD/ Euro in January 2017. The Euro has also depreciated against the US dollar in six of the last nine months. Any such additional increase in regional demand for European base oils will likely limit supply availability for export to other regions. This would provide further upward pressure on prices.
But the price-upside is expected to be limited. The economic outlook for the Euro Area is expected to be tepid in the medium term. According to the IMF World Economic Outlook update published in January 2017, the Euro Area is expected to grow at a slightly slower pace in 2016-2017 relative to 2015. Easy monetary policy, low oil prices and a modest fiscal expansion in 2016 will likely support this year’s growth. But weaker investor confidence on account of uncertainty following the Brexit vote will weigh on activity. Growth for the
whole area is projected to be at 1.7pc in 2016 and 1.7pc from 2017-2018. These are lower than the 2.0pc growth rate in 2015.
In the UK, slower growth is expected due to uncertainty in the aftermath of the Brexit vote. This is expected to weigh on firms’ investment and hiring decisions, and on consumers’ purchase of durable goods and housing. Growth is forecast at 2.0pc in 2016 and 1.5pc in 2017, based on the assumption of smooth post-Brexit negotiations and a limited increase in economic barriers. We expect such trends to have a spillover effect on base oils and lubricants demand in the region.
Group I base oils from other regions are well-positioned to cover for any supply tightness in the European market. US Group I exports remain well-positioned to cover for any unexpected surge in European demand. The premium of Europe domestic Group I prices over US Group I export prices is expected to be wide enough to cover for freight and trading margins. With European domestic prices expected to trend even higher later in the peak demand season, we expect the arbitrage from US to Europe to remain feasible in the immediate term.
The European market could also see more supplies from Russia. Firmer crude prices this year will likely support the
LUBE MAGAZINE NO.138 APRIL 2017
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