Group II and III Base Oil Market

Market Overview

The global group II and III base oil market was valued at USD 21.52 billion in 2022. It is estimated to reach USD 37.93 billion by 2031, growing at a CAGR of 6.5% during the forecast period (2023–2031). The base oil industry is witnessing a significant global trend of shifting demand from Group I base oils to premium base oils, i.e., Group II and III base oils. The major factors driving this change are the demand for higher-performance lubricants, the need for longer drain intervals, increasing disposable income, stringent lubrication regulations, surging refining capacities, and government regulations to reduce environmental carbon footprints.

Group II and Group III base oils are the premium base stocks, containing over 90 percent saturates and less than 0.03% sulfur. The viscosity index is the main distinction between Group II and III base lubricants. Group II base oils have a viscosity index between 80 and 120, while Group III base oils have a viscosity index greater than 120. Due to its higher viscosity index, Group III base oils are utilized predominantly in industrial lubricants and high-performance engine oils to meet stringent engine oil standards without adding polyalphaolefins.

Group II and III base oils are produced through dewaxing, hydrocracking, catalytic dewaxing, and hydrotreatment. It is one of the most essential raw materials used to produce motor, industrial, process, and metal processing fluids. It serves various industries, including heavy manufacturing, automotive, oil and gas, electricity, electrical, cosmetics, and pharmaceuticals.

Market Dynamics

Global Group II and III Base Oil Market Drivers

Increased Use of Premium Base Oil in Asia-Pacific

Rapid industrialization and automation of industries are boosting the demand for Group II and III base oil products. The major chunk of premium base oil is used in the automotive industry, which is growing rapidly in Asia. Currently, the region is witnessing a shift from Group I base oil to Group II and III base oils, and in the future, it is expected to grow faster.

China and India are the major markets for premium base oils due to the rapid urbanization over the past five years, government policies to attract foreign participants to set up their manufacturing base, and, most importantly, the increasing purchasing power of consumers, resulting in increased demand for goods (vehicles, personal care products, and construction activity) along with the quality aspect. Thus, increased use of premium base oil in the Asia-Pacific region is expected to expand the market size.

Increasing Disposable Income

The high disposable income of most of the global population is attributable to the high literacy and employment rates. Thus, such factors contribute to an increasing consumer inclination for premium and smart products (vehicles, packaged food, and premium beauty products) available in the market. Despite the premium pricing, the demand for vehicles among the middle class and the affluent section of society is rising in developed countries such as the US, Germany, Japan, and the developing nations of India, China, and Brazil.

Globally, in 2019, the US emerged as the biggest economy in terms of GDP per capita, with a purchasing power parity (PPP) of over USD 65,118. The high disposable income throws light on the spending ability of the population. The per capita disposable income in the US was USD 48,719 in 2021, an increase of around 2.5% from the level in 2020. Therefore, the higher disposable incomes of people and affordability of consumers are contributing to the demand for vehicles, which, in turn, is supporting the growth of base oil products.

Global Group II and III Base Oil Market Restraint

Rising Demand for Animal-Free Products

With the increasing stringency of vehicle emissions, new and improved regulatory measures, government incentives, and declining battery prices, the demand for electric vehicles (EVs) is gaining momentum. The surging global penetration of electric vehicles may soon reduce the demand for millions of barrels of oil. Around 52% of the total lubricant demand comes from the automotive industry, which is dominated by engine oil. Therefore, the increasing penetration of electric vehicles will significantly affect the base oil market in the coming years. All the factors above are expected to restrict the growth of conventional lubricants.

Global Group II and III Base Oil Market Opportunities

Increasing Group II and III Refining Capacity

Group II and group III base oils have high antioxidant properties, low sulfur content, enhanced viscosity control, and low volatility, acting as prime factors for the surging demand for these base stocks. The growing trends towards better fuel economy, increasing engine oil durability, vehicle emission standards, and reduced pollution levels drive the demand for Group II and Group III base oils. This is, in turn, resulting in high-capacity addition for group II and III base stock.

In developed nations such as the United States, Germany, and France, the industry has refined group II and III base oil capacity, and more is being added to meet the rising demand for group II base oils. On the other hand, the Asia-Pacific region is witnessing steady growth in group II and III base stock capacity as the region is shifting rapidly to the increased usage of highly refined base stock. This market trend is expected to create opportunities for the market growth.

Regional Analysis

North America Dominates the Global Market

Based on region, the global group II and III base oil market is bifurcated into North America, Europe, Asia-Pacific, Latin America, and the Middle East and Africa.

North America is the most significant global group II and III base oil market shareholder and is anticipated to exhibit a CAGR of 6.55% during the forecast period. The demand for group II and III base oil in North America is boosted by stringent regulations for emission standards, better fuel economy, and the growing trend for sustainability. The Group II and III base oil market also benefits from the continuous growth of the construction, automotive, and manufacturing industries. The automotive industry in North America is one of the largest in the world. In 2020, the automotive industry in North America produced 13.4 million motor vehicles, of which 3.2 million were passenger cars. In North America, the U.S. and Canada are the major car-producing countries.

Furthermore, the North American automobile sector will likely attract major investments during the forecast period, promoting improvements. For instance, Fiat Chrysler Automobiles US, Ford, and General Motors made more than USD 34.5 billion in investments. Their reported spending in U.S. plants is approximately five times more than that of Japanese and South Korean automakers combined. Such developments in the automobile manufacturing sector drive the region's demand for group II and III base oil.

Europe is estimated to exhibit a CAGR of 6.24% over the forecast period. Due to strict vehicle emission standards, Europe is a major premium base oil consumption market, resulting in demand for high-quality lubricants by OEM manufacturers. Moreover, the rising demand for personal care products due to consumers' rising interest in personal care and wellness drives the market growth. From the production perspective, the country is dependent on Middle Eastern countries and South Korea to fulfill its domestic demand for Group II and III base oils due to a shortage of manufacturing plants for Group II and Group III base oil driven by the domestic demand rolling towards high- quality base oils. However, a few domestic and international players are gradually setting up new plants for premium base oils to fulfill the domestic demand, while smaller players are struggling to set up group II or III base oil plants since it requires a huge capital investment. Thus, these market insights significantly impact the market growth.

In the Asia-Pacific area, group II and III base oil penetration is currently moderate. However, the region is rapidly shifting to premium-quality base stock driven by the vehicle's stringent emission standards and increasing demand by OEMs for high-quality lubricants. The government across the Asia-Pacific countries is emphasizing reducing the harmful emissions of vehicles by implementing stringent regulations. For example, the government has implemented BS-IV norms in India to address the increasing pollution level. In addition, the increasing manufacturing output, rising disposable income, and the growing mining and construction activities are accelerating the demand for Group II and III base oils. For instance, China's middle-class population is expected to reach 1.2 billion, and its spending is expected to reach over 87% by 2030, per the World Data Lab (WDL) report. Higher disposable income means an increased demand for automotive and residential buildings. This will fuel the demand for lubricants, accelerating the demand for Group II and III base oils in the region in the coming years.

Although Latin America holds the smallest share in the global group II and III base oil market, it is expected that the region will exhibit significant growth during the forecast period because of the discovery of significant oil provinces, the entrance of multinational players to meet the growing demand for Group II and group III base oil, and the increasing demand for premium quality lubricants. For instance, in 2020, Chevron signed a base oil distribution agreement with YPF S.A. (YPF), a vertically integrated Argentine energy company headquartered in Buenos Aires, to set up a new manufacturing plant of group II base oil in Latin America (Argentina).

Segmental Analysis

The global group II and III base oil market is segmented by technology and application.

Based on technology, the global group II and III base oil market is bifurcated into hydrocracking, hydrotreating, catalytic dewaxing, and others. 

The hydrocracking segment dominates the global market and is projected to exhibit a CAGR of 7.93% over the forecast period. Both Group II and Group III base oils are manufactured through the hydrocracking process, which is more severe than the hydrotreating process. Hydrocracking technology has emerged over the past few years as the production "workhorse" for producing premium base oil, i.e., group II and Group III. In addition, increasing demand for high-quality lubricants, especially from the automotive industry, increasing vehicle emission regulations, and low-sulfur marine fuels are vital factors escalating the growth of hydrocracking technology. As hydrocrackers effectively yield low-sulfur base oil, players use hydrocracking technology to produce premium base oil. For instance, Pure Performance, HollyFrontier Corporation, and Shell Global, among others, have adopted hydrocracking technology for producing premium base oil.

Catalytic dewaxing technology is used to produce both group II and III base stock. The demand for catalytic dewaxing technology increases as it produces high-quality base oil. In addition, installing a catalytic dewaxing unit requires low investment, delivers outstanding performance in low temperatures, and provides flexibility to produce both lubricant base stock and light distillates. This fuels the demand for catalytic dewaxing technology for manufacturing group II and III base oils. Key players such as Shell, Pure Performance, and Resolute Oil, among others, use catalytic dewaxing technology to produce group II and III base oil at the refineries. Moreover, Indian Oil Corporation is building its second catalytic dewaxing unit at the Haldia refinery in India. The unit is expected to be completed by April 2023.

Based on application, the global group II and III base oil market is divided into automotive oil, processing oil, industrial oil, and others. 

The automotive oil segment is the largest revenue contributor and is expected to exhibit a CAGR of 6.83% over the forecast period. Automotive or engine oil accounted for 75–85% of base oils and various additives such as dispersants, anti-wear additives, detergents, and others. The main function of automotive oil is to lower friction and wear and tear of the engine and clean the engine of sludge and detergents. Conventionally, a group I base oils were used to manufacture automotive oil. However, due to the presence of a high amount of sulfur and aromatics, all of which negatively impact the lubricant performance and the environment, the demand for Group I base oil for producing engine oil is declining among OEMs.

Additionally, group II and III base oils are highly preferred for manufacturing automotive oils due to the strict emission regulation standards, increasing demand for low-viscosity and low-volatility lubricants, and increasing demand for better fuel economy. In addition, changing lubricant specifications among OEMs are driving the growth of Group II and III base oils, as formulators cannot use Group I to achieve these requirements.

Process oil combines paraffinic, aromatic, non-carcinogenic, and naphthenic compounds derived from base oil. It is manufactured either by advanced hydrocracking or catalytic dewaxing process. It is used across various applications such as adhesives, plastics, rubber, tires, personal care, polymer defoamers, and the textile industry owing to its impressive properties of low volatility (as it constitutes negligible amount of aromatic and sulfur), high saturation, and stability. Process oil is extensively used to produce rubber compounds, popularly known as rubber process oils (RPO). In the rubber industry, process oil is used to enhance the processing of rubber compounds. It also helps to increase the volume of rubber to lower its cost.

Recent Developments

• August 2023: Luberef, a subsidiary of Saudi Aramco, announced that they would begin publishing base oil indexes derived from spot price assessments generated by Argus, a global energy and commodity price reporting agency. The prices will be displayed on Luberef's website to provide investors with greater insight into the dynamics of the base oil market.

• February 2023- Saudi Aramco Base Oil Company (Luberef) signed an Engineering, Procurement, and Construction contract with PETROJET Co. to extend its Yanbu facility to increase its base oil production capacity to about 1.3 million metric tons annually by 2025. The contract will also enable Luberef to produce Group-II and Group-III base oils flexibly in response to market demands.