Group II supplies from overseas markets to Europe have been steadily falling in recent years, particularly those from the US.
In 2019, the introduction of Exxon Mobil’s Rotterdam facility gave Europe its own domestic production capacity, reducing the need for imports, before the pandemic sent the markets into turmoil followed by European quotas piling on further pressure. US production was also hit by February’s deep freeze in the Gulf, leaving less product for export, instead being used in the domestic market. As a consequence of these factors, Group II exports from the US to Europe slumped to 113,000t over the first five months of this year, compared to 152,000t over the same period in 2020 and 279,000t in 2019.
On a yearly basis, total exports of Group II from the US to Europe reached 553,000t in 2018, falling to 494,000t in 2019 and 321,000t in 2020.
The current European quota for Group II imports for the first six months of the year is 200,000t, dropping to 150,000t for the second half of the year. It does not impact any country with a free trade agreement with the EU, while imports above the quota would be subject to a 3.7% import tax. At 156,000t, European Group II imports for the first five months of the year are set to comfortably meet the quota, but are in part a reflection of tighter overseas supplies.
Tighter US supplies, firm demand and higher crude and feedstock prices have encouraged US Group II suppliers to keep increasing prices both domestically and for export. Feedstock availability is a knock-on consequence of low refinery runs last year that have persisted into the first half of this year. As a result, both Group II spot and contract availability have been limited.
Despite the current factors causing Group II tightness both in the US and Europe, a longer term trend by Europe to reduce its reliance on US imports has exporters looking to South America, namely Brazil. South America has taken over from Europe as the biggest destination for US Group II product exports.
The US has exported 153,000t of Group II towards Brazil over the first five months of the year, compared to 57,000t over the same period last year and 102,000t in 2019. US exports of Group I towards Brazil have also stepped up this year at a total of 59,000t over January to May, compared to 27,000t over the same period in 2020 and 38,000t in 2019. Part of the support is coming from rapidly growing car production in Brazil that rose 55% through May versus a year prior but remains behind 2019 levels. Brazilian car sales rose 7.7% month-on-month in May and production would be rising higher still were it not for a global component shortage. Longer term, Brazil may not hold up as an alternative for US base oil exporters if Petrobras plans to produce Group II in Brazil from 2022 come to fruition, denting the need for US imports.