U.S. Base Oil Price Report

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With the year-end holidays around the corner and the shadow of a new wave of coronavirus infections haunting the market, base oil activity was understandably muted. Nevertheless, there were reports that some last-minute transactions and contract negotiations were still being finalized during the week.

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The general trend appears to be that buyers were more eager to secure a larger portion of their supplies under contract, as long as prices were tied to a formula taking into account a large number of indices. Numerous buyers were also using more widespread points of reference and not just posted prices of a particular producer, sources explained. The trend to secure more volumes under contract was fueled by concerns about potentially sharp price fluctuations and product shortages during the year.

Suppliers were also planning to manage inventories differently, keeping more product as a buffer in case of unforeseen circumstances such as severe weather or sudden demand shifts such as those seen over the last two years since the pandemic began.

Market players expected base stock availability to be adequate to long in the first couple of months of 2022, with some segments carrying over various supply issues and others lengthening given that consumption tends to slow down at the end of the year and first few weeks of the new year. Additionally, production rates have been quite high over the last three months – at an average of 80%, according to sources – with base oil output catching up with requirements. However, refiners may have to revise production rates to adjust to the weaker fuel demand levels.

Refinery run rates had been cut back significantly during the first stages of the pandemic as consumption of transportation fuels had slumped, but since it had recovered – even though it had not reached pre-pandemic levels – production rates had increased and this had led to more plentiful supply of feedstocks for base oils. Now these efforts could be jeopardized by the onslaught of the Omicron variant.

Supply of API Group I cuts has improved since September, and this has led to considerable downward adjustments of spot prices – although consumers said that in the grand scheme of things, Group I prices had gone up to such steep levels earlier in the year that the downward adjustments were not making a huge dent in pricing. Demand for these grades had been steady in the domestic market and Mexico, although Mexican demand has experienced variations and buyers were hoping to find year-end bargains, particularly for cargoes moving through Brownsville, Texas. Availability of competitively-priced Group II supplies was placing pressure on Group I offers to Mexico as well.

The Group II light-viscosity grades were readily available, but producers have been trying to find a home for these products in export markets such as India and the Middle East. Almost 30,000 metric tons of Group II grades have been lined up for late December shipment to India.

Imports of Group III supplies continued unabated, with demand described as healthy and availability fairly tight, although there was ample supply of 6 centiStoke and 8 cSt grades to cover requirements and more cargoes were on their way to the U.S. from the Middle East and South Korea, according to sources.

In terms of paraffinic base oils pricing, softer fundamentals were exerting pressure on price ideas, but no posted price decreases were reported. Spot prices have lost some territory, with numbers seeing decreases in the realm of 3-15 cents per gallon week on week as producers tried to encourage traders to take cargoes for export. There were also efforts to increase volumes sold to domestic customers.

On the naphthenic front, prices were steady-to-softer given lower crude oil prices and weaker demand levels, particularly as far as export transactions were concerned. Indications fell by 5 to 10 cents/gal for domestic and export business, according to sources.

Due to recent naphthenic plant turnarounds in the U.S. and an upcoming one in February, supply was fairly well-balanced against demand in this segment of the market, although stocks were lengthening as it is typical at this time of the year. The permanent shutdown of a naphthenic plant on the U.S. Gulf two years ago and ongoing production issues at another facility were seen as conducive to the tighter supply/demand conditions that this segment has displayed in recent months.

As mentioned above, San Joaquin Refining has started building inventories as the producer will be embarking on a three-week turnaround at its naphthenic base oils plant in Bakersfield, California, on Feb. 1. The unit can produce 8,100 barrels per day of naphthenic base oils, according to Lubes’n’Greases Base Stock Plant Data.

While there has been talk about a number of buyers requesting special discounts and temporary voluntary allowances, there were no widespread reports of suppliers granting these initiatives. Market players said that offering large discounts or decreasing posted prices would be counterproductive to consumers, as many finished lubricant manufacturers were implementing increases of up to 15% on lubricants, greases, coolants and other products in December and early next year. Lower base oil prices would only erode some of these initiatives and would in fact prompt end-users to seek decreases at a time when lubricant suppliers would be shipping products manufactured at higher production costs, sources explained.

At the same time, lubricant manufacturers were still facing some raw material shortages, especially of additives, which forced them to dial back production rates. This, in turn, translated into lower base oil demand, a situation that may be prolonged into the first part of 2022.

Upstream, crude oil futures rebounded on Tuesday, after starting the week on a downward trend on concerns about surging cases of the Omicron coronavirus variant in Europe and the U.S. Analysts feared that new restrictions to control its spread would cripple fuel demand. Crude futures rose as there were expectations that data would show a draw on U.S. oil inventories from the previous week. Skirmishes in Libya resulted in a force majeure on oil exports, and this provided further support to crude prices.

On Dec. 21, West Texas Intermediate February futures settled at $71.12/barrel, compared to $70.73/barrel for January futures on Dec. 14.

Brent futures for February delivery settled at $73.98/barrel on the CME on Dec. 21, from $73.70/bbl on Dec. 14.

Light Louisiana Sweet crude wholesale spot prices were hovering at $71.44/barrel on Dec. 20 and had settled at $73.44/bbl on Dec. 13, according to the Energy Information Administration.

Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.

Lubes’n’Greases Publications shall not be liable for commercial decisions based on the contents of this report.

Archived base oil price reports can be found through this link: https://www.lubesngreases.com/category/base-stocks/other/base-oil-pricing-report/

Historic and current base oil pricing data are available for purchase in Excel format.

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