Europe’s December Base Oils Supply Tightens, Disruption Risk Rises

Europe’s base oils supply fell in December for an eighth straight month, leaving the regional balance tighter than usual at the start of the year and more exposed to supply disruptions ahead of a seasonal rise in demand.

Total supply, or output and imports combined, held at close to 500,000 tonnes in December, slipping from around 520,000 tonnes in November and down 4% year on year, Ministry of Environment and Energy Security, CBS Statline and other government data showed.

Lower supply contrasted with a sustained rise in year-on-year demand, leaving the market more balanced than usual ahead of the typical spring pick-up in consumption.

Firmer demand fundamentals could now compound the impact of a supply shock as surging crude prices and Middle East disruption threaten both feedstock availability and the flow of Group III shipments into the region.

Key Highlights

·         December demand, or regional consumption and exports combined, climbed for the third time in four months as stronger overseas shipments offset muted regional lubricants demand.

·         Fourth-quarter base oils exports climbed to the highest since early 2023, reflecting the sustained pick-up in shipments to overseas markets.

·         December’s supply surplus recovered to a four-month high but was the smallest for that month in three years, a sign of a structurally tighter balance than in recent years.

·         The fourth-quarter surplus fell to less than 50,000 tonnes, down from close to 300,000 tonnes in the third quarter and more than 180,000 tonnes in the same period a year earlier.

Market Repercussions

Slack regional lubricants demand and expectations of adequate base oils supply had incentivized blenders to maintain lean inventories, holding back restocking until they were comfortable that the typical early-year price weakness had passed.

The lower surplus at the start of this year partially cushioned that dynamic, easing downward pressure on prices and cutting the volume of surplus supply refiners needed to clear in export markets.

Both dynamics now face a reversal. A surge in diesel crack spreads from the start of March incentivized refiners to prioritise middle distillate output over base oils, raising the prospect of trimming supply just ahead of a round of plant maintenance.

Any disruption to refinery feedstock supplies could compound that pressure, tightening the balance at the same time as a seasonal pick-up in lubricants demand.

Concern over availability could accelerate restocking as blenders move to lock in supplies ahead of the spring oil-change season, adding pressure to a market where supply is already tightening.