Despite the fact that domestic base oil demand has shown few signs of strengthening, the market seemed to be fairly balanced thanks to the endeavors of a number of suppliers who concluded export transactions over the last few weeks, lowering their inventories and avoiding a significant product overhang. Upcoming turnarounds also helped reduce surplus volumes as the affected producers were building inventories. Prices reflected the balanced conditions in that they remained fairly stable, although spot deals were taking place below contract levels.
Demand from most lubricant segments was less vigorous than expected for this time of the year, although there were upticks in some segments such as the industrial and automotive applications. The Memorial Day holiday on May 29, which traditionally marks the start of the summer driving season, was just around the corner and suppliers hoped that this meant that additional requirements would start to roll in. Still, finished lubricant inventories were substantial and this kept buyers from returning to the base oil market to procure more product.
Base oil refiners faced the conundrum of having to continue producing base stocks – which added to already bulging inventories – instead of being able to direct more feedstocks into the distillates stream, as diesel demand and values were down.
Over the last few weeks, producers have focused on finalizing export business, with cargoes lined up to the Middle East, India, Europe and Latin America in May and June. Buying interest from Brazil was robust as the main local producer was experiencing output difficulties. There was talk about South Korean product moving to Brazil to fill the supply gaps as prices for U.S. base oils were deemed high and some grades have tightened, offering fewer opportunities to export product. A few cargoes were heard to have been concluded to Mexico as well, but buying appetite remained lackluster, with buyers delaying purchases for as long as possible in hopes of seeing lower prices in the coming weeks on expectations of a stagnant market in the U.S.
Despite all of this export business, base stock supply was deemed ample to cover current consumption, with the heavy grades said to be tighter than the low-and mid-viscosity cuts. At least two producers were heard to have availability of API Group II volumes.
On the domestic side, Calumet was planning to complete maintenance work at its Group I and Group II plant in Shreveport, Louisiana, in the second half of July and was expected to build inventories to maintain supply during the outage.
Similarly, Chevron was heard to be padding its inventories to meet demand during an upcoming turnaround. The company will be taking its Group II plant in Pascagoula, Mississippi, offline in early June for twenty-one days, limiting spot offers from the producer.
At the same time, the Excel Paralubes plant in Louisiana – which was recently restarted after an extended maintenance program – was heard to be running at top rates and additional supplies were expected to be entering the market. Both the Chevron and the Excel Paralubes turnarounds involved catalyst changes, and this was likely to allow for increased output levels, according to sources.
A couple of Group II producers with the ability to produce Group III grades were heard to have increased output of these cuts given better margins, meeting some of the domestic demand which is typically fulfilled by imports from South Korea, Canada and the Middle East.
A planned turnaround at a South Korean Group III facility in late May to June was expected to tighten availability in Asia and possibly curtail shipments to the U.S., although the refiner has been building inventories to cover requirements during the outage.
In the naphthenic base oils camp, prices were reported as stable, propped up by current crude oil and feedstocks prices and balanced-to-tight market fundamentals. While requirements have been slightly lower than anticipated, they have been healthy enough to cause some tightening in certain segments such as light-viscosity oils going into the transformer oil sector. Requirements for heavy-viscosity grades have been picking up as activity was expected to increase in the tire production segment. There has also been fairly constant buying interest for U.S. products from Europe, Asia and Latin America.
Pale oil suppliers admitted that there may be some substitution with paraffinics in a few applications because of more competitive pricing, and that this could lead to a lengthening of certain grades, particularly as most base oil plants have been running at top rates. If this situation became more widespread, suppliers may be willing to offer price concessions, sources noted.
Downstream, lubricant manufacturers were facing challenges in that demand for finished products remained lackluster and additive prices have not been reduced. The April posted price decreases for base oils have helped somewhat, but production costs remained high. There was intense competition among suppliers to gain or retain market share, but even with some of the incentives being granted, blenders were reticent in terms of how much product they were able to acquire because inventories were still quite hefty.
Upstream, crude oil futures climbed on Tuesday driven by a surprise U.S. inventory drop and optimism that the country would avoid a debt default. Prospects of a tightening market and a warning from the Saudi energy minister to speculators that fed expectations of further OPEC+ production cuts offered additional support. Futures had already jumped by 2.8% on Monday as U.S. gasoline futures strengthened ahead of the Memorial Day holiday on May 29, which traditionally marks the start of the peak summer demand season.
On May 23, West Texas Intermediate (WTI) July futures settled on the CME at $72.91/barrel, compared to $70.86/bbl for June futures on May 16.
Brent futures for July delivery settled on the CME at $76.84/barrel on May 23, from $74.91/bbl on May 16.
Louisiana Light Sweet crude wholesale spot prices were hovering at $73.76/barrel on May 22, from $73.57/bbl on May 15, 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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