Some corners of the United States base oils market seemed to be tighter than others but finding enough product in the domestic arena did not appear to be a problem, as availability in general has begun to lengthen. This scenario was not unusual in the last quarter, as demand tends to slow down during this time of the year. Consumers try to use up existing inventories, and both producers and buyers start to release some of the extra stocks they had kept during hurricane season. There was again talk about a potential railroad workers’ strike after a major union rejected a tentative agreement with freight carriers, which could affect transportation and deliveries in coming weeks.
The recent base oil posted price decreases communicated by producers in September were also not a complete surprise – historically, most price decreases take place during the fourth quarter, unless there are exceptional circumstances like major supply disruptions. However, the price reversal observed in crude oil and feedstock markets last week on the back of an OPEC+ production cut announcement was expected to mitigate some of the downward pressure generated by the base oils supply and demand imbalance. The steeper crude oil prices also fed concerns about rising inflation and an accompanying slowdown in consumer spending.
A number of producers were considering lowering production rates in order to reduce the supply overhang or might direct more light viscosity grades into the distillates stream. One major producer has recently restarted its plant and was heard to be running at close to full rates, following an unplanned turnaround extension that lasted two months, and a second producer appeared to be dealing with ongoing minor output issues. A third major supplier, Motiva, has just begun a turnaround.
Motiva was heard to have taken its API Group II and Group III unit in Port Arthur, Texas, down for a turnaround as several of the refinery’s units were also undergoing maintenance. The base oil plant was expected to restart at the end of the month. The producer had built inventories to cover requirements during the outage, according to sources.
All of these output reductions had resulted in a fairly tight Group II supply situation, particularly in terms of the heavy grades. However, there were reports that availability has improved, but spot volumes remained almost non-existent.
The lighter grades within the Group I and Group II segments remained plentiful and spot prices have come under pressure, with numbers falling by 3-6 cents per gallon week on week. Group I bright stock and Group III grades appeared less vulnerable to downward pressure because of snug supply and steady demand.
Last week, market participants had expressed concern about supply chain and transportation disruptions caused by Hurricane Ian in several Southeastern states, but most operations and activities, except for some in the hardest hit locations in Florida, were gradually getting back to normal levels, according to sources.
Many base oil contract discussions were expected to take place this week over the phone or via video conferences as participants were unable to meet in person at the annual Independent Lubricant Manufacturers Association meeting in Florida scheduled during the first week of October, since the event was cancelled due to Hurricane Ian.
The storm regrettably claimed many lives and caused serious damage to homes and businesses in the affected areas. Reconstruction efforts were expected to result in increased demand for lubricants used in the construction industry.
The naphthenic segment also saw an uptick in demand for base oils used in transformer oil applications, as the hurricane damaged electric grids and equipment along its path, although logistical issues may delay the onset of this demand.
These conditions have led to a further tightening of some segments of the pale oils market, which have seen reduced supply due to an unexpected shutdown at a plant in August and a planned turnaround this month. The tighter supply and demand ratio had offset some of the downward pressure coming from softer crude oil and feedstock prices in September, but these values have now bounced back.
Calumet was expected to begin a turnaround at its naphthenic base oils plant in Princeton, Louisiana, this week and restart the plant at the end of the month. It was heard that the producer had also prepared inventories to cover contractual obligations during the turnaround.
On the import/export front, demand for U.S. products from Mexico was described as lukewarm and was not expected to pick up significantly over the next few weeks. Brazilian buyers had actively sought U.S. base oils in the first half of the year, but economic and political uncertainties – including an indeterminate presidential election going into a second round – have dampened buying interest. Prices in other regions have weakened and freight rates stayed relatively high, making it difficult for U.S. products to compete. Even so, there have been discussions to move base oils to India, with an 8,000-10,000-metric ton cargo quoted for shipping from the U.S. Gulf to West Coast India in the second half of October.
Downstream, the additive supply situation appeared to be improving as two major additive producers have lifted their force majeures. While suppliers maintained allocation programs, buyers said that more additives seemed to have become available, which was good news as several lubricant manufacturers have had to reduce manufacturing rates due to the lack of additives over the last several months.
Given consecutive base oil price increases in the first half of the year, along with additive price hikes – including one scheduled to go into effect this month – many lubricant manufacturers had hoped to implement increases between June and October, but the recent base oil posted price decreases undermined some of these initiatives. Nevertheless, a number of suppliers were still hoping to push through finished products and lubricant increases on the back of steep base oil prices, continuing inflation, and higher transportation costs. The fact that crude oil prices had reversed course and had increased over the last few days added fuel to their initiatives. Some lubricant manufacturers have delayed the implementation dates or lowered the amount of their increases.
Upstream, crude oil futures fell on Tuesday after climbing in previous sessions as the World Bank and the IMF voiced their worries about a potential global recession and the dollar strengthened on fears of additional rate increases. China’s renewed COVID-related lockdowns and the possibility they would include cities like Shanghai and limit oil consumption also affected pricing. The impact of the OPEC+ output cuts was outweighed by all these concerns.
Diesel cracks have reached all-time highs this week on an extremely tight inventory situation and an ongoing refinery strike in France, which was expected to exacerbate the situation. The U.S. continues to export large amounts of diesel despite the tight conditions at home, according to different media reports.
On Oct. 11, West Texas Intermediate (WTI) November futures settled at $89.35/barrel, compared to $86.52/bbl on Oct. 4.
Brent futures for December delivery settled on the CME at $94.29/barrel on Oct. 11, from $91.80/bbl on Oct. 4.
Louisiana Light Sweet crude wholesale spot prices were not available on Oct. 10 due to the Columbus Day holiday. They were hovering at $86.50/barrel on Oct. 3, 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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