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Group I supply rose to a three-month high in June as flows from Italy and Poland increased
Group I gained share as Group II and Group III supply fell in the second quarter
Formulation requirements limited substitution, leaving higher Group I availability unable to replace premium grades
Europe's Group I base oils supply climbed to a three-month high in June, leaving buyers with more base oils but little relief where formulations required Group II or Group III.
Group I supply rose to more than 170,000 tonnes in June from less than 165,000 tonnes in May, the second-highest level in 10 months, according to data compiled from Eurostat and national sources including the UK's Department for Business, Energy and Industrial Strategy, and Spain's Secretary of State for Energy.
The increase contrasted with a fall in Europe's Group II supply to its second-lowest level in seven months, and a sustained decline in Group III supply, which fell to a multi-year low in the second quarter.
But the extra supply did little to plug the premium-grade gap. Group I exports to non-EU markets reached their highest second-quarter volume in three years with more supplies finding buyers overseas rather than covering Europe's premium-grade shortfall.
Europe’s supply balance was becoming increasingly divided by grade. Group I was available, but it was not replacing tighter Group II and Group III supply, pointing to limited substitution where formulations had grade-specific requirements.
Key Highlights
· Group I supply rose as higher output from Italy and Poland and increased imports offset a slowdown from the UK and Spain.
· Group I accounted for 42% of European Group I, II and III supply in June, up from 39% in May and 34% in the first quarter.
· Group I shipments to non-EU markets rose 13% year on year in the second quarter, while net Group I supply fell from the first quarter.
Market Repercussions
The mismatch between the grades showed up in prices, with the Group II and Group III premium over Group I tripling in June from the first two months of the year.
That premium, combined with more limited regional demand for Group I base oils, gives more reason for refiners to add premium-grade capacity. Polish refiner Orlen plans to start a new Group II base oils unit in the second half of the year, increasing premium-grade supply and tapping those elevated prices.
But adding premium-grade capacity takes years. Even Orlen began construction of its new unit several years ago, when the premium for higher-grade base oils was much lower.
