Europe’s base oils market held only a thin surplus in June, as a deepening slump in imports kept supply tight heading into the third quarter, limiting the overhang ahead of the usual summer build.

Total supply, or regional output and imports combined, held at just over 500,000 tonnes for a second straight month, Eurostat, MET, GUS and other government data showed.

Total demand, or regional lubricants consumption and base oils exports combined, fell to less than 480,000 tonnes from more than 490,000 tonnes in May, leaving a surplus of more than 20,000 tonnes, up from close to 10,000 tonnes in May.

The supply squeeze came almost entirely from imports, with slumping shipments from the Middle East and US outweighing a rise in cargoes from Asia.

That left Europe with tighter supply than usual heading into the summer slowdown, when weaker seasonal demand typically triggers a large buildup in surplus volumes. The seasonal build was starting from a second-quarter deficit rather than the surplus normally seen at this point in the year.

That limited surplus increasingly consisted of Group I base oils, rather than the premium grades blenders needed.

Key Highlights

·         Imports fell 37% year on year in June, a third straight month of annual decline, leaving inflows close to a 28-month low.

·         Output held steady at more than 370,000 tonnes, as higher Italian and Polish production offset weaker volumes from the UK and Spain.

·         Regional lubricants demand fell by 4% year on year, its second straight monthly decline, unwinding part of the March-April stock-building surge.

·         Europe moved to a second-quarter deficit of 36,000 tonnes, contrasting with a surplus of more than 130,000 tonnes in the same quarter in each of the previous three years.

Market Repercussions

Blenders heading into the third quarter faced a supply-build that was starting from a smaller base and in the wrong grades.

Group I's share of Europe's combined base oils supply already rose to 42% in June from 34% in the first quarter, as imports of the premium grades remained under pressure.  

Even a Group I surplus could be smaller than expected. Group I exports to markets outside the EU climbed to their highest second-quarter volume in three years, limiting the volume that stayed in Europe.

Group III remained scarce, with no recovery in flows from the Middle East and maintenance work in Europe and Asia limiting supply from alternative sources.

Group II remained reliant on the Netherlands and the US, where the domestic supply balance was also increasingly tight.

Blenders have been running down stocks since the spring demand surge, and a return to more normal procurement as the summer slowdown ends would start rebuilding them. That rebuild would meet a market with less surplus to draw on than usual for the time of year.