Europe’s Group III base oils supply recovered in June as Asian suppliers stepped up shipments to offset the collapse in Middle East flows, but maintenance at several of those sources now threatens to deepen the shortfall.

Supply rose to more than 100,000 tonnes in June from less than 80,000 tonnes in May, according to Eurostat, Port Authority of Cartagena and HMRC data. The volume was the highest in three months though still well below the more-than 140,000-tonne monthly average in the year to April.

Even with the improvement, supply fell below 275,000 tonnes in the second quarter from more than 465,000 tonnes in the first three months, the lowest quarterly volume in at least seven years.

Supply slumped because of the collapse in Middle East flows, which continued into June. The rebound instead came from Asia, and especially South Korea, which was simultaneously boosting flows to the US for the same reason.

That dual role raises the same risk that Europe and the US faced with their reliance on the Middle East. The concentration that left both markets exposed when Middle East flows collapsed could now be repeating itself with South Korea.

Key Highlights

·         Supply from Asia rose to more than 53,000 tonnes in June, the highest since July 2021.

·         Supply excluding the Middle East rose above 105,000 tonnes, the highest in 13 months and above the roughly 83,000-tonne monthly average of the past year.

·         Middle East shipments fell below 2,000 tonnes in June, leaving the region with just 7% of Europe’s Group III supply in the second quarter, compared with more than 35% during the previous three years.

·         SK Enmove and S-Oil both reported sharp increases in second-quarter base oils profits and margins amid stronger South Korean exports to Europe and the US.

·         South Korean exports to Belgium and the Netherlands reached more than 24,000 tonnes in July, the highest in 13 months.

Market Repercussions

The increase in alternative supplies narrowed the shortfall left by the Middle East slump, although June's supply remained well short of fully plugging it.

Some of that increase came from refiners delaying their own planned maintenance to keep supply elevated while the Middle East disruptions kept supply tight and prices elevated.

That maintenance is now due. Finland and Malaysia both have maintenance scheduled for August, and Spain's is expected in the coming weeks, all coinciding with each other and with the Middle East disruption that has yet to ease.

With that capacity offline, the market will have fewer alternative sources to draw on, pointing to tighter supply in the months ahead.