Yet Asia-Pacific base oil prices are some of the lowest globally, highlighting the importance of other factors, like supply, in determining prices.
Structural production capacity has risen in 2024 relative to levels in 2023. This underlines a slew of plant start-ups in recent years, with production materialising more recently. Global nameplate production capacity is now at its highest level on record, at approximately 60mn t/yr.
Close to half of this capacity is concentrated in Asia-Pacific, underlining the region’s role as a net exporter of lubricant feedstock. This supply structure also explains why any slowdown in exports from Asia-Pacific – as observed in recent years – would lead to a build up of inventory and put more downward pressure on prices, at least relative to other regions.
In 2025, expectations are that prices will not only increasingly reflect the rise in structural supply in recent years, but also in the months ahead. In India, two Group II/III refineries are set to begin operations in the first half of 2025. In Singapore, a 1mn t/yr Group II plant will start in the second half of the year. These additions are set to boost Asia-Pacific Group II and Group III nameplate capacity by approximately 8pc and 4pc, respectively.
The price pressure from rising production capacity, however, will likely be countered by firmer demand in a lower interest rate environment. Inflation has largely stabilised in key economies around the world, boosting the prospect of further declines in the cost of borrowing to boost consumption and investment spending. The US Federal Reserve has decreased its benchmark federal funds rate by one percentage point since September 2024. Median projections call for 50 basis points of rate cuts in 2025.
Yet any rise in demand will likely differ across regions. An appreciation of the US dollar against a basket of currencies has slowed some regional trade flows in late-2024 and early-2025 as the relative cost of imports rises. The US dollar index rose by 6.6pc on the year to 108.06 in December 2024.
US President Trump has also shown an inclination towards ICE vehicles, and the oil sectors more broadly. Any policies to support growth in these areas– including the removal of electric vehicle (EV)
tax credits – will likely slow the decline in conventional engine oil demand from a larger EV fleet in the US.
EV sales continue to account for a larger share of vehicles sold globally. The International Energy Agency estimates that EVs will make up 16-17pc of the global vehicle fleet by 2030, and Argus estimates that up to 7-8pc of lubricant demand will be destroyed in such a scenario – equivalent approximately to the entire marine lubricant sector. Case in point: China’s automotive sector is the largest in the world – in both sales and production – and the result is a marked slowdown in both lubricant consumption and import requirements.
Any rise in OPEC+ production is also expected to decrease the cost of base oils production, which has risen more recently following new US sanctions on Russian oil producers and vessels shipping Russian crude. Moves to reduce OPEC+ production cuts have been delayed from December 2024 to April 2025 due to weak demand and rising production outside the group. OPEC+ members are currently cutting output by a total of 5.86mn b/d.
While demand-supply fundamentals point to lower prices for the lubricant feedstock, some grades will likely receive more price support than others.
Prices for heavy grades have held relatively firm following a structural decline in Group I production capacity. Group I supply has shrunk at a faster pace than demand, and a smaller degree of base oils interchange – especially for grades such as bright stock – has boosted heavy-grade prices relative to supplies with a lower viscosity. While having a lower viscosity index, Group I base oils have a higher degree of solubility, which makes them better suited for formulations requiring more additives.
The rise in nameplate capacity has also weighed on premium-grade prices especially. In 2024, an emphasis on Group III production because of high premiums relative to Group II has incentivised more refiners to subject their feedstock to a higher degree of hydrocracking. The result is rising availability of Group III base oils, and their lowest premiums to Group II since early-2023.
argusmedia.com
LUBE MAGAZINE NO.185 FEBRUARY 2025
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