OREANDA-NEWS. Asia-Pacific base oil prices rose in 2016 on the back of a price surge in the first half of the year. But a drop in prices during the second half of the year trimmed the size of the increase.

Group II heavy-grade prices posted the largest rise, climbing from less than $500/t fob Asia in February to more than $740/t fob by early July. They then pared those gains during the second half of the year, easing to less than $670/t by end-November, before recovering in the last few weeks of the year.

Group I heavy-neutrals also rose strongly during the same period, from around $425/t in February to around $640/t fob in June. These prices also then dipped by some $80-90/t during the second half of the year before staging a recovery in December.

The price surge in the first half reflected the impact of a rebound in Chinese demand from late February. The revival in buying interest was unusually strong and fast, after many blenders had purposefully kept stocks low and held off replenishing inventories because of the sustained slide in crude prices during the second half of 2015 and January 2016.

Refinery run cuts in China, the delayed start-up of new capacity in that market, and preparations for the nearly two-month shutdown of Taiwan's 600,000 t/yr Group II plant from June added to the tightness.

The subsequent sharp rise in prices opened the arbitrage to China. That incentivised producers to prioritise that market ahead of others such as India and southeast Asia. Supplies to those markets then tightened.

The pick-up in buying activity in China also coincided with tighter Group I supplies in southeast Asia, where annual demand typically peaks in markets like Thailand around March and April. The rise in domestic consumption at that time curbed availability of surplus supplies for export during those months. Unexpectedly strong demand during the following months sustained that tight availability.

Stockbuilding ahead of a scheduled Group I plant shutdown in Thailand in the third quarter of the year extended the tightness through the summer. The drop in supplies helped to counter the impact of a seasonal slowdown in demand during the summer months.

Group I supplies from Indonesia also tightened in the second quarter of the year as domestic blenders built stocks ahead of the fasting month of Ramadan, which began in early-June. Indonesia's Group I plant then also had a one-month shutdown from late July for scheduled maintenance. The shutdown similarly slowed any buildup of surplus supplies during the summer months.

Besides tight availability, Group I prices got a boost in the first half from stronger demand on the back of the surge in Group II prices. The premium of Group II heavy-grade prices over Group I increased to as much as $130/t in July, from less than $50/t at the start of the year. The wide price gap incentivised some buyers to switch to Group I base oils instead.

A repercussion of the price surge in the first half of the year was an open arbitrage from Europe and a steady flow of Group I heavy neutrals from that market to southeast Asia and China. Those shipments exacerbated the third-quarter supply build following the end of most Group I and Group II plant maintenance by September.

The pick-up in regional supplies also coincided with weak Indian demand during the monsoon season from June to September. Chinese demand for heavy-grade base oils also faced a seasonal slowdown ahead of the winter months. Group I and Group II prices subsequently fell steadily throughout the third quarter of the year.

The premium of Group I and Group II heavy-grade base oils to light-grade prices also narrowed in the second half of the year. But the drop was more muted than during the same period in 2015. Group II heavy-grade prices held at more than $160/t to light grades in the fourth quarter of 2016, down from a premium as high as $200/t in mid-year. The price spread had fallen to less than $110/t at the end of 2015, although it also peaked that year at a lower level of around $170/t.

The relative price strength of heavy-neutrals reflected the impact of more plentiful Group II light-grade supplies in the region throughout the year.

With supplies more readily available, fob Asia Group II light-grade prices fell more steeply than heavy-grade prices in the first two months of the year, before bottoming at around $370-380/t fob. They then rose less strongly before peaking at around $565/t fob Asia in mid-year. Like heavy-grade supplies, light-grade base oil prices got a boost from an open arbitrage to China in the first half of the year.

The rise in Group I light-grade prices was even more muted during the first half of the year. Prices peaked at around $490-500/t in mid-year, after bottoming at around $380-390/t in February. Their relative price weakness and steep discount to heavy-grade prices curbed the incentive for refiners to produce the product. The tighter availability helped to limit the price drop in the second-half of the year to just $20-30/t from its peak level.