Activity in the United States base oils market proceeded at a moderate pace as participants enjoyed the last few days of the summer holidays and buyers delayed purchases on expectations that prices would remain under pressure given softer fundamentals.
Domestic orders were steady to slightly slow because consumers have adopted a more conservative attitude in terms of how much product to acquire and preferred to use up existing inventories whenever possible. At the same time, both buyers and producers were keeping extra stocks to cover potential supply shortages were a hurricane to disrupt production along the U.S. Gulf Coast. Severe weather is more common during August and September in the Atlantic Basin and the U.S. National Hurricane Center predicted a busy hurricane season this year.
Refiners have also increased output at base oil units against a weakening of fuel prices. Gas prices have fallen for 62 consecutive days and will likely continue to decline, with the national average for a gallon of regular gas reported at $3.96 on Monday, down $1.06 – or 21% – since hitting a record high on June 14, according to CNN.com.
Crude oil and feedstock prices have softened compared to levels seen at the beginning of the summer and have therefore taken some of the pressure off base oil values. This was one of the main reasons for naphthenic producers to reduce pricing, sources said.
Ergon, Calumet, Cross Oil and San Joaquin Refining communicated 30 cents per gallon decreases, which went into effect between Aug. 5 and Aug. 10. San Joaquin announced its decision to decrease prices by 30 cents/gal, effective Aug. 10, late last week. Other suppliers were still evaluating their market positions.
On the paraffinic side of the market, posted prices remained stable, but spot prices have edged down on mounting supply and slowing demand, not only in the Americas, but in Europe and Asia as well. Domestic spot prices have seen drops between 5 cents/gal and 15 cents/gal week on week, but export prices underwent more significant reductions. Market participants attempted to conclude export deals and reduce the product overhang for some of the more abundant grades, but a lack of vessel space on certain routes, high freight rates and lukewarm buying interest continued to hamper business.
There were also sporadic reports of suppliers granting temporary voluntary allowances or value adjustments of between $10-30 cents/gal to select customers, depending on volumes and other conditions. Granting these discounts was a way to fend off more generalized posted price adjustments, sources noted. Producers were also keeping an eye on any possible supply disruptions that may impact pricing in the next few weeks and were more reluctant to revise overall postings.
In Mexico, some buyers resisted the offer prices for U.S. base oils, but a few consumers had to acquiesce to the current pricing because they needed to replenish stocks. Others had enough inventory to be able to hold off on further purchases until prices moved lower. API Group I and Group II cargoes continued to move to Mexico from more distant sources at competitive prices, meeting some of the current requirements. A 5,000 metric ton cargo was heard to be in discussion for shipment from Gdansk, Poland, to Brownsville, Texas, in early September, possibly for onward shipment to Mexico.
Several base oil parcels were expected to arrive in the U.S. and other destinations in the Americas from Asia and the Middle East over the next few weeks to meet spot demand, as well as contract business. The spot cargoes were secured at attractive prices as growing supply was exerting downward pressure on pricing in other regions. A 3,500-metric ton parcel was mentioned in shipping circles for lifting in Sitra, Bahrain, to Houston in mid-September. About 5,000 to 10,000 metric tons were expected to be shipped from Singapore to Houston in late August/early September, possibly to cover intra-company supply needs.
Domestic Group II supplies were considered balanced-to-tight, with availability of the heavy grades said to be limited. An ongoing maintenance program at a Group II facility – which is expected to be completed at the end of the month – coupled with an upcoming turnaround at another key producer’s Group II/III facilities in October were expected to tighten supplies in this segment. Traders were looking for light viscosity grades for export, but suppliers deemed price indications on the low side. U.S. exports to South American nations such as Brazil have declined compared to the first half of the year.
Group III cargoes move regularly under contract from South Korea, Canada and the Middle East to meet growing demand in the U.S., but additional spot availability was detected over the last few weeks, as additive shortages have forced some blenders to curtail operating rates, leading to reduced base oil consumption. A distributor of Middle East material was heard to have increased its U.S. sales in May, moving up to the third position in terms of import volumes. Group III availability may tighten as a supplier was expected to have few additional barrels for the remainder of the year beyond those volumes needed to cover contractual obligations.
A key supplier of additives, Afton Chemical, declared force majeure on additive production from its plant in Sauget, Illinois, following flooding that forced the unit to shut down on July 26. Some blenders have been placed on up to 50 percent allocation for the next two months, while others said the impact had been minimum as they receive products from various suppliers.
This was just the latest in a litany of incidents and adverse situations that have affected the global additives segment since late 2019, with lubricant blenders and finished product manufacturers having had to reduce operating rates or place customers on allocation as a result.
Given the tight supply conditions and steep costs of raw materials, an additive supplier has communicated a price increase of up to 15 percent for this month, while a second additive supplier planned to implement a price hike on Sept. 1.
Lubricant manufacturers also announced price increases in June, July and early August, and at least one supplier intended to adjust prices by up to 15% on Sept. 1 as well. However, it was heard that some suppliers have delayed implementation or adjusted the amounts of the lubricant increases because of slower lubricant demand.
Upstream, crude oil futures extended their loss on Tuesday as gloomy economic data from China – the world’s second top oil consumer – fanned concerns about a global recession, while there continued to be talk about a revived nuclear deal with Iran that would eventually allow for more Iranian oil exports to come to the market.
On Aug. 16, West Texas Intermediate September futures settled at $86.53/barrel, compared to $90.50/bbl on Aug. 9.
Brent futures for October delivery settled on the CME at $92.34/barrel on Aug. 16, from $96.31/bbl on Aug. 9. Brent futures were near $100/bbl in late July.
Louisiana Light Sweet crude wholesale spot prices were hovering at $94.69/barrel on Aug. 15, compared to $96.17/barrel on Aug. 8, 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.
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