Base oil prices remained exposed to downward price pressure as supply continued to outpace demand and crude oil values have softened. However, given that a number of producers have trimmed operating rates or directed more feedstocks into the distillates stream, there were expectations that the product overhang would be kept in check over the coming weeks. Many market participants were anticipated to be away from the office at the ICIS Pan American Base Oils and Lubricants’ conference in New Jersey this week, where discussions will center on Latin American market developments, electrification, and transportation and logistics, among other topics.
There were also expectations that a national rail strike set to start on Dec. 9 would be averted through the government’s intervention. The United States could face a paralyzing rail strike as members of the nation’s largest rail union were trying to negotiate improved work conditions such as more reliable schedules. Democratic and Republican leaders seemed to agree with President Biden that “a work stoppage just days before Christmas would deal a devastating blow to the nation’s economy,” and were working to move legislation through the chambers ahead of the strike’s deadline, The New York Times reported.
Low water levels on the Mississippi River, which have forced barges to lighten their loads and driven barge transportation costs up, were also on participants’ radar.
One of the main concerns for base oil suppliers, however, remained the current imbalance between supply and demand. Consumption levels typically start to languish after the summer driving season is over in early September and do not pick up until the first quarter of a new year. Suppliers expected market conditions to improve in February and hoped that posted prices would be on more secure footing by then.
An extended turnaround planned for early 2023 at a large API Group II facility on the Gulf Coast, which could last up to two months, was also expected to contribute to a tightening of supplies as the producer was likely to build inventories to meet most contractual obligations during the outage, but was expected to limit spot availability. There was no producer confirmation about the turnaround schedule.
For the moment, spot prices remained under pressure as suppliers strove to find buyers both in the domestic system, as well as on the export front. However, plentiful supplies in other regions along with softer prices made it more difficult for U.S. suppliers to find suitable outlets for their products.
Spot prices for the most readily available grades – the light and mid-viscosity cuts within the Group II category – have fallen by about 5 cents per gallon week on week. Some suppliers were also heard to be granting temporary voluntary allowances into select accounts as a means to stave off a general posted price decrease. The heavy grades within the Group II segment were tight following a plant turnaround at a major plant last month that mainly affected production of the Group II 600 neutral grade.
The Group I heavy viscosity oils and bright stock appeared more balanced against domestic requirements after several producers lowered their production rates. A number of export cargoes involving Group I barrels were also concluded in recent weeks. There were discussions centering on potential U.S. shipments of Group I base stocks to Brazil, although demand has also experienced a slowdown in that country following a contended presidential election and economic uncertainties.
Mexican buyers continued to show interest in light viscosity base oils, but there was a large gap between buying and selling price ideas, which led to muted trading. High inventories were reported in Brownsville. Several cargoes from Asia had arrived in previous weeks for onward shipment to Mexico and these were gradually being moved south, meeting immediate product needs. South Korean product was deemed competitively priced compared to U.S. product and suppliers therefore kept an eye out for any opportunities that might emerge, although the Mexican market appeared quite well-covered for now.
Demand for Group III grades was fairly steady, particularly for the 4 centiStoke grade as it is used in new automotive formulations. The 6 cSt and 8 cSt grades were more abundant, and there were no signs that imports from Canada, Asia and the Middle East would be slowing any time soon.
On the naphthenic base oils side, buying appetite from several sectors, including transformer oil, and tire and rubber manufacturing have shown a small uptick. This situation, coupled with a recent planned turnaround at a naphthenic base oil plant and unexpected production issues at another facility earlier in the year, have led to a slight tightening of supplies. An upcoming turnaround at a third unit may prolong the snug conditions, offering support to the current price structure.
San Joaquin Refining confirmed that the company would be starting a turnaround at its refinery in Bakersfield, California, in late January 2023. The company will be installing a new vacuum distillation tower, and the unit was expected to be down for approximately four weeks.
Blenders continued to face additive supply issues, although overall availability has improved with the lifting on two force majeures and the relaxation of sales allocations. Moreover, demand for lubricants has also softened, which in turn has led to a small adjustment in additive consumption at blending facilities. There were expectations that additive supply would remain strained into the first quarter of 2023, particularly as demand for lubricants was expected to start increasing at that time.
Lubricant manufacturers had hoped to recover some of the production cost increases brought about by several rounds of base oil price hikes in the first half of the year, together with inflation, steeper raw materials and transportation costs, and higher raw materials. However, a softening of lubricant demand has compelled a few blenders to keep lubricant prices unchanged or even offer small discounts to promote orders.
Upstream, crude oil futures jumped on Tuesday on an American Petroleum Institute report showing an unexpected draw in U.S. crude inventories. WTI also rose on Tuesday on talk that OPEC+ may decide at its December meeting to cut production for January with the goal of propping prices up.
At the same time, growing protests in China against the government’s zero-COVID policies weighed on oil prices over concerns that the incidents would impact the country’s crude consumption.
On Nov. 29, WTI January futures settled on the CME at $78.20/barrel, compared to $80.95/bbl for December futures on Nov. 22.
Brent futures for January 2023 delivery settled on the CME at $83.03/barrel on Nov. 29, from $88.36/bbl on Nov. 22.
Louisiana Light Sweet crude wholesale spot prices were hovering at $78.85/barrel on Nov. 21, from $84.74/bbl on Nov. 21, 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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