S-Oil reported that its base oil business posted second quarter operating income of 41.4 billion won (U.S. $35.1 million), down 48.8 percent from 80.9 billion won in 2018s second quarter. Revenue also fell 18 percent to 344.3 billion.

The spread in Asia between base oil and high-sulfur fuel oil prices averaged $26.30 per barrel during the quarter, down from $41.30/bbl for the same period of 2018, the Seoul-based refiner noted in an earnings report released this week.

Industry sources generally agree that the base oil market has a capacity overhang that continues to grow as new capacity comes onstream. Fuels such as high-sulfur fuel oil and diesel are alternative products to base oils. Base oils are almost always higher priced, but they lack the economies of scale that fuels enjoy and incur some additional costs so that refiners may start to shift production away from base oils even when they are priced higher.

S-Oil reported that its base oil plant had an 89.2 percent usage rate during the second quarter, down from 92.3 percent during 2018 and 96.5 during 2017. The decline may have been partly due to a temporary maintenance shutdown this year at the companys base oil plant in Onsan, South Korea.

S-Oil makes API Group II and Group III base oils. The spread that the company cited is an aggregated number that also entails Group I base oils. However, the spread of high quality products [like those supplied by S-Oil] remained robust from the previous first quarter, it stated. Looking ahead to the third quarter, the company forecasted that the spread is expected to maintain at the current level, as global demand would remain stagnant.

The company added that it expects global supply of Group II and III base oils to increase 15,000 barrels per day this year, while demand for those grades grows just 9,000 b/d. It predicted that demand will begin to catch up to supply in 2020 and 2021.

Hyundai Shell Base Oil

The second quarter operating profit for Hyundai Shell Base Oil decreased 82.8 percent to 4.5 billion won, down from 26.1 billion won a year ago. This occurred despite a 10 percent increase in revenue from base oil sales by the joint venture between Hyundai Oilbank and Shell, from 201.1 billion won to 221.2 billion won.

In its earnings report last week, holding company Hyundai also cited the shrunken spread between base oil and high-sulfur fuel oil.

Hyundai said base oil margins suffered not only because of capacity increases, but also because of demand hits caused by a weakening economy and the U.S.-China trade dispute. Margins did rebound a bit during the second quarter, an official said, thanks to maintenance shutdowns at multiple base oils plants.