Europe’s April Base Oils Supply Shortfall Surges To 26-Month High

• Europe's base oils market swung from surplus to its largest supply shortfall in more than two years as Middle East imports collapsed

• The rapid shift changed market sentiment more than immediate availability after strong first-quarter stock-building

• Demand has since started easing, but lower Middle East imports are likely to keep Europe's premium-grade market tighter for longer

Europe's base oils market swung to its largest supply shortfall in more than two years in April as Middle East imports collapsed, tightening the market but from an unusually well-stocked position.

Regional supply, comprising domestic production and imports, fell below 460,000 tonnes in April from more than 640,000 tonnes in March, Eurostat, Secretary of State for Energy, MET and other government data showed.

Output dropped to a six-month low while imports fell to their lowest level in 26 months after shipments from the Middle East reversed March's surge.

Total demand — combining regional lubricants consumption and exports — rose 12% year on year to more than 530,000 tonnes, leaving supply below demand for the first time in three months.

The shortfall itself was not the concern. Its speed was.

The market entered the second quarter well supplied after a large first-quarter surplus, meaning the initial impact pointed to changing market expectations more than physical availability.

Key Highlights

·         Imports dropped to a 26-month low as Middle East shipments fell to their weakest level in almost three years.

·         Regional lubricants demand rose for a second straight month, with March marking the strongest growth in almost five years.

·         Exports rose 12%, adding to a 22% surge to a fourteen-month high in March.

·         Supply lagged demand by more than 80,000 tonnes in April, reversing a surplus of more than 70,000 tonnes in each of the previous three months.

Market Repercussions

April was the turning point in Europe's supply balance rather than the onset of an outright shortage, with the market reacting to the unusually large swing of more than 150,000 tonnes in a single month.

The market entered the second quarter carrying unusually strong inventories. That left buyers relatively well protected even as imports from the Middle East collapsed and regional supply fell sharply.

The April imbalance was unlikely to be repeated at the same scale in the coming months as disruption-driven demand began to ease, including in Italy.

But Middle East shipments were set to remain low in the following months, keeping Group III supply tight.

The drop in shipments left Europe facing a tighter premium-grade market than earlier this year, even as the overall supply-demand balance was likely to improve as disruption-driven demand continued to ease.