Base Oil Report
One of the most striking features of the European base oil market in recent months has been the divergent trends of the various Group I grades, specifically brightstock versus the light and middle viscosity grades.
From June, the price gap in the export market between SN500, a middle viscosity base oil, and brightstock, the heaviest, has widened to its highest amount since December 2008-February 2009. Indeed, during this earlier period the large price spread was the brief result of crashing prices brought about by the global financial meltdown. Excluding the 2008-2009 period, the current spread is widest since ICIS price assessments began in 1998.
Price trends tend to emerge first in the export market before being replicated in the domestic market, and lately the SN500- brightstock price gap has indeed begun to widen for domestic prices too, albeit as yet to lesser degree.
So what’s going on? Some market sources believe this is the first manifestation of the impact of Group II and Group III on the older Group I market.
Prior to this change in relative pricing came a refinery closure – the Colas refinery in Dunkerque, France, in April. Following this, Total will close half of the base oil capacity at its Gonfreville, France, refinery at the end of November and Shell will shut down its production at Pernis, in the Netherlands, at the end of the year.
These closures are ultimately the consequence of the technology paradox that exists for base oil production, in that Group II and Group III base oils are of higher quality, according to most parameters, but cost less to produce than Group I. It is logical to assume, therefore, that Group I base oils will eventually be replaced by other the Groups, for most applications at least.
Such a replacement is not straightforward, however, as Group I base oils can only ever be partially superseded due to the lower viscosity profile of Groups II and III. Replacement of a base oil with the equivalent from a different Group assumes that other parameters, primarily the viscosity, are the same or at least similar. This is no issue for the light and middle viscosity Group I base oils, for which there are ready equivalents in the other Groups.
However, brightstock, the heaviest grade of the Group Is, is unique in that there are no grades in the other groups with an equivalent viscosity; Group II and III production simply does not create heavy enough oils. As such, any applications that require the high viscosity offered by brightstock cannot in theory switch to anything else.
In light of this, market watchers have long expected brightstock to become a specialty product, as demand erosion for light and middle viscosity Group Is squeezes margins and causes production rationalisation, thereby tightening brightstock supply but without a corresponding decrease in brightstock demand.
The result will be an ever larger gap between the prices of brightstock (already the most expensive due to lower yields) and the other grades.
Ross Yeo Senior Editor Manager (Europe) ICIS
LINK
www.icis.com
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