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 SINGAPORE (ICIS)--Spot prices of base oils in Asia are expected to remain buoyed in the first quarter of 2018 on the back of robust demand and a regional supply crunch.

This is expected to apply to both light and heavy grades across the groups, which are largely facing snug spot availability in December 2017.

The existing supply crunch is attributed to a spate of production woes, including upstream vacuum gas oil (VGO) unit issues, catalyst problems, as well as turnarounds at regional Group II and III units.

Major Group I units were largely stable in their production, but as availability of Group II stocks was short, demand for Group I cargoes grew among buyers who could use both Group I and II base oils for their downstream purposes.

Vehicles move slowly in a traffic jam on a road in Beijing (Imaginechina/REX/Shutterstock)

Ahead of the Lunar New Year holiday in February 2018, buying appetite among Asia-based buyers is likely to remain healthy in early January as buyers seek to obtain cargoes which would arrive ahead of February.

Furthermore, Hurricane Harvey's heavy impact on some US-based refiners in late September 2017 also led to unexpected plant shutdowns lasting for as long as four weeks at certain units.

As such, the US observed increased appetite for Asian-origin base oils to meet the shortfall caused by the hurricane.

Deep-sea shipments were made from Asia to the US for October and November, resulting in depleted spot allocation to Asian buyers.

Typically, the Asian market would receive significant volumes of US-origin material in the fourth quarter, as US-based refiners sought to keep inventories low ahead of the closing of accounts and holiday season.

However, such a situation was not observed in 2017.

The number of offers for deep-sea shipments was significantly fewer than in  previous years, and this factor, along with the others mentioned above, created the existing supply shortage and active demand among buyers.

From the upstream perspective, crude futures were trending upwards in November, exerting upward pressure on offers and workable selling indications among refiners amid increased production costs.

Most refiners in Asia are currently grappling with lean spot inventories but enquiries from buyers for material were still coming in actively.

"Buyers are definitely still seeking material, especially of light grade SN150. We receive active requests, but have no choice but to reject most of these requests as we are unable to meet everyone's demand," a northeast Asia-based Group I refiner said.

The same supply crunch was observed for Group II base oils, especially for the light grades.

A Group II northeast Asian refiner was understood to be able to sell January-loading cargoes, but not for December, contributing to the bullish sentiment in the existing base oils market.

Amid the supply crunch, spot prices in Asia for both Group I, II and III base oils are poised to be buoyed throughout January.

Going further into the first quarter, demand for cargoes in February would seasonally wane on the back of the Lunar New Year festive season, as some key markets in Asia would be shut during the festive holidays.

As a result, prices could potentially observe less upward movement in February on slower cargo uptake.

Despite so, expectations of price declines are limited, due to upcoming turnarounds at some northeast Asia-based Group II and III base oils units, which would likely result in curtailed supply.

As such, most market participants, including buyers, were of the opinion that spot prices for base oils across the various groups in Asia would remain supported for most part of the first quarter.

Outlook article by Jasmine Khoo

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