Low supply to cushion EU base oil prices
European base oil prices should benefit in the first half of 2022 from stronger seasonal demand and tighter supply resulting from lower refining rates and global plant maintenance.
Refinery operating rates will continue to depend on margins on transportation fuels, which could take another hit if more restrictions are imposed due to the Covid-19 Omicron variant. Lower crude throughput would result in lower availability of vacuum gas oil (VGO) and hydrocracker bottoms, which in turn would reduce base oil production and spot supply, to support prices. .
EU refinery run rates hit a low of 67% in May 2020 during the first Covid-19 lockdown, resulting in extreme supply tension that supported spot prices between June 2020 and July 2021. Europe Group I and II spot prices have since trended downward, but Group III prices have held firmer due to tighter supply.
The production rates of refineries in Europe were on average 77% between July and November 2021, according to data from Euroilstock and Argus calculations. This is five percentage points lower than during the same period in 2019, but five points higher than in 2020.
Group I spot prices are likely to find support from stronger seasonal demand between February and June 2022, while lower inventory levels at the end of 2021 will exacerbate any tightening in supply resulting from the decline. refinery production rates. While maintenance plans for the first half of next year are unusually thin, unscheduled shutdowns would exacerbate the tightness of Group I. So far, only one refinery in the Mediterranean has confirmed three-week maintenance for February 2022.
The closure of the 180,000 t / year Group I base oil unit at Portuguese refiner Galp in 2021 will affect Group I availability from January, when the company will start sourcing to cover its application for mixing lubricants. Galp covered internal demand from stocks until the end of 2021.
Group II prices in Europe are expected to be supported by a significant round of plant maintenance scheduled for North America in 2022. EU mixers continue to depend on Group II imports from America North and Asia-Pacific, as well as domestic production to meet demand.
The changes made to the EU group II import quota in 2022 will add a tax of 3.7 pc to a higher amount of imports from countries that do not have free trade agreements ( ALE), which will increase price support. The EU group II duty-free import quota will be reduced by 50% to 75,000 t for the first semester and will be abolished from the second semester. From July 2022, all Group II imports from countries that do not have an FTA will be subject to a tax of 3.7 pc, which will mainly affect imports from North America.
Group III prices are expected to trend higher in early 2022 after remaining unusually strong for most of 2021. Group III base oil spot prices – with and without approvals from oil equipment manufacturers ‘origin (OEM) – remained more stable, while the prices of Groups II and I base oils fell from mid-2021.
The reduced availability of hydrocracker funds for Group III production combined with the maintenance of facilities at two Group III refineries in Europe in 2021 will affect supply, which continues to support spot prices. Although work to add up to 50 pc of capacity to a unit in the Mediterranean was completed in July 2021, the has not yet increased the availability of spots.
Higher freight rates and logistical challenges related to Covid-19 disruptions could continue to restrict Group III movements from Asia-Pacific to Europe. The limited one-time availability of Group III could increase competition for excess cargo from Asia-Pacific with buyers from North America, potentially pushing EU spot prices further as buyers increase their offers to win cargoes.
By Clara Toellner and Catherine Caulfield