The summer doldrums that typically envelop the base oils market in July and August appeared to have started earlier this year, as activity has been steady, but not particularly robust. Perhaps the lackluster conditions were just a continuation of a rather insipid spring season. Despite the implementation of posted price decreases in June, there was no sharp spike in order volumes. Even so, suppliers did notice improved buying interest from a few segments as buyers who had been waiting for lower prices and drawing down inventories have finally returned to the market.
Paraffinic base oil suppliers lowered posted prices between 5 cents per gallon and 35 cents/gal, depending on the grade and the producer, with implementation dates set during June 1 to June 19. These initiatives encouraged some consumers to step back into the market and purchase additional cargoes. “We are seeing some signs of increased orders for July,” a source commented, but most suppliers acknowledged that the price decrease had not been as successful in attracting new business as expected. A few blenders were heard to be well-supplied and continued to secure only minimal term volumes.
Lubricant buyers were pressuring manufacturers to lower finished lubricant prices given the recent base oil price decreases and healthy supply. Blenders were also hoping to see additive price adjustments.
The soft market fundamentals were not only a concern at present but could also compound an expected slowdown in the second half of the year. Base oil requirements tend to decline in the fall, and inventories are generally plentiful. While scheduled turnarounds might help keep supply and demand more balanced, refiners might also have to resort to adjusting plant operating rates to avoid oversupply. For the time being, most refineries in the United States and Canada were running full out due to heightened gasoline demand during the summer, and base oil plants were also being operated at top rates because of higher margins for base oils against weaker diesel premiums.
Suppliers continued to explore opportunities to export U.S. base oils to minimize the product overhang and keep spot prices from falling. Several cargoes were concluded to Brazil, Mexico, Nigeria, and several destinations in Europe in recent weeks. Sources said that prices in Mexico had fallen, particularly after the posted price decreases in the U.S. A couple of suppliers have been able to conclude business in Mexico, but others found prices to be too low.
About 1,000 metric tons were mentioned for prompt shipment from Houston, Texas, to Santos, Brazil. A 2,000-ton cargo was heard to have been concluded from Lake Charles, Louisiana, to Rotterdam, Netherlands, in the first half of June. About 5,000 tons to 7,000 tons were being considered for shipment from Paulsboro, New Jersey, or Houston to Apapa, Nigeria, in late June to early July. A 4,000-ton parcel was on the table for shipment from the U.S. Gulf to Israel in early to mid-July. In terms of imports, there was mention of a 7,000-ton to 8,000-ton cargo to be shipped from Antwerp, Belgium, to Houston in the first half of July.
Despite recent buying interest from Latin America, Europe, the Middle East and Africa, there was concern that base oil demand would start to weaken in all regions in the third and fourth quarters because of seasonal patterns and economic uncertainties, and this would limit export options. Furthermore, ongoing Asian plant turnarounds will be completed in the coming weeks, and additional material will likely become available, placing pressure on prices, while demand in key markets such as China and India will be slowing down.
One factor that may upend these predictions might be an unexpected event such as a hurricane along the United States Gulf Coast – where many refineries are located – which could bring about base oil output disruptions and a surge in prices. Participants have not built inventories to the extend they had in previous years on predictions of a mild hurricane season. Any severe weather-related disruptions could therefore have a greater impact on supplies.
While base oil demand has not been as strong over the last four months as it has traditionally been during the lead-up to the summer driving season, export transactions and a number of turnarounds have helped keep API Group I and Group II inventories in check. A Group I producer was also utilizing more of its output internally and had less spot material to offer. A Group II producer was heard to have offered a couple of spot cargoes to traders.
A recent turnaround at the Excel Paralubes Group II plant in Louisiana resulted in reduced domestic supply of Group II grades in the second quarter. The producer’s plant was reported to be running well.
A three-week turnaround scheduled at Chevron’s Group II unit in Pascagoula, Mississippi, starting this month could lead to strained conditions during the third quarter. The producer was expected to fulfill contractual obligations but may not have spot availability during and after the turnaround, according to sources.
Calumet was preparing for a routine turnaround at its Group I and Group II plant in Shreveport, Louisiana, in the second half of July. The producer was also planning to build inventories to meet demand during the outage.
Group III supply was fairly balanced against demand, but additional imports from the Middle East may be tilting the scale towards oversupply conditions. There were expectations that volumes imported from South Korea could see an increase in the coming months as well as supply in that region has started to lengthen.
In the naphthenic camp, prices remained steady, with producers evaluating market fundamentals to decide whether any price adjustments would be necessary. While crude oil prices have softened, a majority of suppliers polled concurred that conditions in the naphthenic base oils sector were dissimilar to those impacting pricing in the paraffinic segment. Supply and demand conditions were balanced-to-tight, and this propped prices up. Steady export business also helped manage domestic inventories and supported pricing.
The light-viscosity pale oils were in high demand within the transformer and construction segments, and while supplies of the heavier viscosities were slightly longer, consumption from the asphalt and rubber sectors was described as quite vigorous, drawing large volumes of base oils.
Some naphthenic buyers have seen downward price adjustments due to the fact that a number of refiners’ formula prices are linked to a diesel index, and diesel prices have slipped in recent weeks.
Upstream, crude oil futures edged down on Tuesday morning as analysts continued to focus on sluggish U.S. demand and muted global economic growth. These factors overshadowed geopolitical uncertainty in Russia, following an insurrection by a mercenary force, and expectations of additional economic stimulus measures in China.
On June 27, West Texas Intermediate August futures settled on the CME at $67.70/barrel, compared to $70.50 bbl for July futures on June 20.
Brent futures for August delivery settled on the CME at $72.26/barrel on June 27, from $75.90/bbl on June 20.
Louisiana Light Sweet crude wholesale spot prices were hovering at $71.29/barrel on June 26, from $73.81/bbl on June 16, according to the Energy Information Administration. There was no trading on June 19 due to the Juneteenth holiday.
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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