Base Oil Break Up

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US base oil exporters are facing significant demand changes because of higher Group II
availability in Europe and the continued global switch from Group I to Group II base oils.
Higher availability, more competitive prices and a wider range of applications compared to
Group I make Group II the dominant global base oil. US Group I exporters can still find
demand in certain sectors and from other regions, but the market is shrinking. High viscosity
and solvency properties within Group I heavy neutrals and brightstock are useful for
specialist applications such as gear oils, hydraulic fluids, greases and various uses in the
marine sector. There is also demand from regions such as Central and Latin America that
continue to draw significant Group I volumes from the US because of less advanced
lubricant requirements within the automobile sector.

Despite use in these sectors, Group I base oils still face an uncertain future. Demand from
the marine sector is now facing a shake-up as ships switch to low sulfur bunkers to address
IMO 2020, the tighter sulfur cap that goes into force for maritime shippers in January. The
need for lubricant solvency will be less prevalent for low sulfur fuels because they have
fewer alkaline compounds that need to be dissolved. Also, higher feedstock costs required to
produce the lubricants that will run with new low sulfur fuels may prove too costly for some
suppliers and consequently cause even more Group I production to shut down. US exports
of Group I have declined this year because of lower global demand. From January to
October 2018, US exports of Group I stood at 403,060 tons, 17 percent higher than the
334,388 tons shipped over the same period in 2019.

Latin America demand for US Group I continues
Latin America still takes the lion’s share of US Group I exports. From January to October
2019, Group I exports from the US to Latin America stood at 187,271 tons, down slightly
from 204,938 tons over the same period last year. Lower performance requirements for
automotive lubricants fuel Latin American Group I demand, but manufacturers are beginning
to seek more advanced formulations, which is slowly driving Group II demand higher.

Group I flows from the US to Mexico rose between January and October of this year to
57,475 tons, up from 51,684 tons during the same period last year. Conventional
multigrades and monogrades still account for more than 60 percent of total engine oil
demand in Mexico, resulting in more frequent oil changes.

Notable declines in Group I flows from the US this year are toward Northwest Europe and
West Africa. Group I volumes from the US to Nigeria have dropped from 75,106 tons over
the first 10 months of 2018 to 47,597 tons during the same period this year. This is mainly
being replaced by Group II demand because of more competitive pricing. Northwest
European flows have dropped from 22,497 tons between January and October of 2018 to
13,531 tons over the same period in 2019, as higher availability of Group II in Europe
encourages consumers to switch.

US Group II market hit by increased European capacity
Total Group II exports from the US dipped from 1.13mn tons from January to October of
2018 to 1.04mn tons during the same period of this year. The most significant change has
been the introduction of Group II production in Europe, which has throttled demand for US
base oils. The Exxon Mobil refinery in Rotterdam, Netherlands, began Group II production in
early 2019 and has been ramping up ever since. Increased Group II production in Europe
makes the region less dependent on costly US exports and put downward pressure on Group II prices in Europe. Group II offers enhanced oxidative stability, reduced volatility and
superior low-temperature performance relative to Group I base oils. Demand for Group II has
been boosted specifically by the automotive sector in the search of increased fuel economy
and longer drain intervals.

As a consequence of increased Group II availability in Northwest Europe, exports from the
US to the Netherlands have been hit. Group II flows from the US to the Netherlands were
142,773 tons from January to October 2018 but have dropped by 38 percent to 89,157 tons
over the same period this year. As European Group II infrastructure continues to improve,
the region is likely to become even less reliant on US Group II imports.

A portion of the Group II volumes lost to Northwest Europe is finding its way to Latin
America. Exports to Latin America from the US were 344,673 tons from January to October
of last year, but have increased to 377,752 tons over the same period this year. The bulk of
the rise in Group II flows was to Brazil, which represents 62 percent of Group II exports from
the US to Latin America. Brazil’s lubricant market, the largest in Latin America, is moving to
more advanced lubricants to support the performance requirements of its modernizing fleet.

A weak global economic outlook, increased global base stock capacity, as well as the major
impact of IMO 2020 will shake up base oil flows even more next year. The key trends of
increased Group II availability, low sulfur bunkers from the start of next year and a
modernizing global automotive fleet will continue to put downward pressure on US Group I
exports. US Group II exports may see further increases in demand from regions like Latin
America as Northwest European demand continues to slow.