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ANALYSIS


Europe base oil values strengthen during lockdown


Catherine Caulfield, Argus Media


European Solvent Neutral (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 2% vacuum gasoil (VGO) averaged $422/t in March and then $436/t in April. The premium was the highest 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 cargos 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.


The firmer supply fundamentals initially countered the impact of sliding base oil demand caused by the wave of coronavirus restrictions throughout Europe.


The 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. That country has become the largest outlet for US exports.


The Asia-Pacific market similarly had to contend with 36 LUBE MAGAZINE NO.157 JUNE 2020


a slump in demand from India following the lockdown of that country 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 markets like Africa, India, Mideast Gulf and the east Mediterranean.


Europe and fob Baltic export base oil prices were increasingly uncompetitive versus those supplies. But the manageable supply in Europe in March curbed the urgency to respond with lower 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 those export markets. But storage tanks in those markets were already brimming with supplies from US and Asia-Pacific.


Europe’s refiners struggle to sell to overseas markets in May as supply builds. Refiners have slashed export prices to their lowest levels 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 level on record.


LINK www.argusmedia.com


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