Group II and III Base Oil Market

Market Overview

The global group II and III base oil market was valued at USD 22.89 billion in 2023. It is estimated to reach USD 40.34 billion by 2032, growing at a CAGR of 6.5% during the forecast period (2024–2032). 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.

Highlights

• Hydrocracking dominates the technology segment.
• Automotive oil dominates the application segment.
• North America is the highest shareholder in the global market

Market Dynamics

Global Group II and III Base Oil Market Drivers:

Increasing Demand from Automotive Industry

The growing automotive industry is a significant driver for the Group II and III base oil market. With the rising production and sales of vehicles globally, the demand for high-performance lubricants is escalating. Group II and III base oils are essential components in the formulation of automotive lubricants due to their superior properties, such as higher viscosity index, better oxidation stability, and lower volatility.

For instance, the International Organization of Motor Vehicle Manufacturers (OICA) reported that global vehicle production reached approximately 91 million units in 2019, highlighting the substantial market for automotive lubricants. Moreover, stringent emission regulations and fuel economy standards are pushing automakers to adopt advanced lubricants that enhance engine efficiency and reduce emissions, further propelling the demand for Group II and III base oils. The trend towards electric vehicles (EVs) also presents opportunities, as these vehicles require specialized lubricants to manage their unique thermal and mechanical requirements.

Industrial Growth and Modernization

The industrial sector's growth and ongoing modernization efforts are also driving the demand for Group II and III base oils. These base oils are integral in the manufacturing of industrial lubricants, which are used extensively in machinery and equipment maintenance across various industries such as manufacturing, construction, mining, and power generation. The global industrial lubricants market was valued at USD 64.4 billion in 2020 and is expected to grow at a CAGR of 4.4% from 2021 to 2028.

Modern industrial operations require lubricants with high performance and longer service life to ensure efficiency and reduce downtime. Group II and III base oils, with their enhanced performance characteristics, meet these requirements effectively. Furthermore, the rise of automated and advanced machinery, which operates under severe conditions, necessitates the use of high-quality lubricants, thereby bolstering the demand for these base oils.

Global Group II and III Base Oil Market Restraint:

Volatility in Crude Oil Prices

One of the primary restraints affecting the Group II and III base oil market is the volatility in crude oil prices. Base oils are derived from crude oil, and fluctuations in crude oil prices can significantly influence the production costs and pricing of base oils. For example, the crude oil market has experienced substantial volatility due to geopolitical tensions, changes in supply-demand dynamics, and economic uncertainties. The COVID-19 pandemic further exacerbated this volatility, leading to a sharp decline in crude oil prices in early 2020, followed by a gradual recovery.

Such fluctuations create an unpredictable business environment for base oil manufacturers, affecting their profitability and investment decisions. Additionally, high crude oil prices can lead to surged production costs, which may be passed on to end-users, potentially reducing demand for Group II and III base oils. This price sensitivity poses a significant challenge for market participants, necessitating effective risk management strategies to mitigate the impact of crude oil price volatility.

Global Group II and III Base Oil Market Opportunities:

Increasing Group II and III Refining Capacity

The surge in Group II and III refining capacity presents a transformative opportunity in the Base Oil market. According to the International Energy Agency (IEA), global production capacity for these groups has increased by 35% between 2018 and 2023, now exceeding 42 million tonnes annually. Asia leads this expansion, with China's Group III capacity growing from 1.2 million tonnes in 2018 to 3.5 million tonnes in 2023—a 192% increase driven by Sinopec's $2.5 billion refinery upgrades.

Similarly, India's new HPCL Group II plant, commissioned in 2022, increased the nation's self-sufficiency from 25% to 80%, as highlighted by the Ministry of Petroleum and Natural Gas. In the Middle East, Group III capacity has doubled since 2020, reaching 2.4 million tonnes, with ADNOC's Ruwais refinery contributing 40% of this output, according to OPEC's Annual Statistical Bulletin. These expansions indicate significant growth potential and self-sufficiency improvements in the Global Group II and III Base Oil Market.

Regional Analysis

North America Dominates the Global Market

Based on region, the global 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 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 significant CAGR 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.

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 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 to produce premium base oil.

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 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, the 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.

Recent Developments

• January 2024- Shell Deutschland GmbH has made a definitive investment decision (FID) to transform the hydrocracker at the Wesseling site in the Energy and Chemicals Park Rheinland into a production facility for Group III base oils. These oils are utilized in the production of top-notch lubricants like engine and transmission oils.