There were contrasting views about base oils demand in the United States, with some suppliers seeing steady uptake in July, and others noticing a gradual decline in requirements. Base oil and lubricant consumption typically softens in the second half of the year following a strong summer driving season, which is generally believed to end on Labor Day in early September. The lackluster buying interest may have also stemmed from buyers securing smaller volumes on hopes that they may be able to acquire additional product if prices succumb to downward pressure in the coming weeks.
Some market participants see holding thin inventories as a potential problem in the U.S. if there are weather-related disruptions during the busiest period of the hurricane season in late August and September. From all accounts, both buyers and suppliers were keeping lower inventories than in years past, perhaps expecting a mild hurricane season.
Despite pressure from supply and demand fundamentals, posted prices were currently holding at stable levels, with some support coming from the crude oil and feedstocks side. Crude oil prices have moved up because of expectations of reduced global supply and increased demand from China, which is currently the world’s largest importer of crude oil. Russia has been one of the biggest oil suppliers to China since the beginning of the Russian war on Ukraine. “China is importing record volumes of oil despite a weak economy as it takes advantage of cheap Russian crude to build stockpiles and export refined products,” the Financial Times reported last week. In the first half of 2023, China imported 2.13 million barrels per day of oil from Russia, surpassing the 1.88 million bbl/d from Saudi Arabia, making Russia the top crude supplier to China so far this year.
During the week, crude oil futures jumped to three-month highs on Tuesday on signs of tighter global supply due to production cuts from OPEC and allies, and efforts by Chinese authorities to strengthen the world’s second-biggest economy.
On July 25, West Texas Intermediate (WTI) September futures settled on the CME at $79.63/barrel, compared to $75.75/bbl for August futures on July 18.
Brent futures for September delivery settled on the CME at $83.64/barrel on July 25, from $79.63/bbl on July 18.
Louisiana Light Sweet crude wholesale spot prices were hovering at $81.31/barrel on July 24, from $76.72/bbl on July 17, according to the Energy Information Administration.
High operating rates at U.S. refineries to meet strong gasoline demand have also led to healthy base oil output levels as refiners allocate feedstocks to produce base oils given more attractive margins compared to diesel. However, the situation may change in coming months if refiners adjust run rates to avoid an inventory build. Base oil demand was anticipated to see a small uptick in the fall, but that activity was still expected to be “below what should be at that time of the year,” a source commented.
Most base oil producers have been able to place product both in the domestic market, as well as in the export arena. Despite a recent turnaround at a large API Group II plant on the U.S. Gulf Coast, there were reports of several cargoes having been finalized for shipment to Europe and Brazil. European buying interest appeared to be fizzling out, however, as economic concerns and the summer holidays resulted in subdued activity.
Brazilian consumers were building stocks ahead of extended plant turnarounds in the third and fourth quarters. Demand from Brazil has been fairly steady throughout the year given unplanned production outages, while the upcoming turnarounds appeared to have magnified the need to import base stocks.
There have also been some movements of Group I and Group II cargoes to Mexico, although buyers’ price expectations were considered quite low. Nevertheless, a couple of suppliers have acquiesced to the reduced bid levels in order to find a home for their base oils. A U.S. Group I producer was abstaining from selling spot cargoes as it is utilizing more of its base stock output for its own lubricant production. A second Group I/Group II producer was not participating in export business as it was undergoing a plant turnaround.
In the Group III segments, there have been additional volumes available for import as two key Group III plants have resumed production, following routine maintenance, and attractive pricing in the U.S. was also luring more shipments from the Middle East. The plentiful availability was exerting downward pressure on pricing, with spot prices heard to have fallen by a few cents per gallon.
The situation may be further exacerbated as a U.S. producer announced that it would start offering an additional Group III base oil cut manufactured at its plant in California. In a press release dated July 23, Chevron Product Company announced that the producer had started first U.S. commercial production of Nexbase 3043 base oil at its plant in Richmond this month. This base oil cut will complement the company’s Nexbase 3060, which has been produced in Richmond since 2019. (For further details, see separate story in this issue of LR Americas).
According to market sources, Chevron’s existing Group II base oil trains and units will be used to produce Group III and the producer can adjust its output depending on customer demand and the company’s own lubricant production needs.
Meanwhile, Chevron’s Group II unit in Pascagoula, Mississippi, was expected to have restarted following a turnaround and catalyst change which began in late June. The producer had built inventories to meet contractual obligations during the outage but had restricted its spot offers.
Calumet will be conducting a routine turnaround at its Group I and Group II plant in Shreveport, Louisiana, in the second half of July, but the maintenance will only affect the unit that produces the light viscosity grades, the producer said. Calumet has also been building inventories and expects to maintain supply during the shutdown.
A third Group II producer, which had suffered unexpected production issues in June, has also been working on rebuilding inventories.
On the naphthenic front, supply and demand were deemed balanced, with domestic consumption of the lighter grades described as healthy, particularly in the transformer oil sector. The heavier grades had also seen flourishing requirements from the tire and rubber segments earlier this summer, but demand appeared to be declining.
Export transactions to Europe and Asia had sustained a steady pace and allowed naphthenic base oil suppliers to keep domestic inventories from building. However, as mentioned in connection to paraffinic oils, demand from Europe has started to weaken slightly on account of political and economic concerns and summer holidays, which sometimes result in reduced production rates at manufacturing plants. A heat wave which enveloped large parts of Europe also led to reduced activity.
In downstream segments, lubricant suppliers were heard to be granting discounts as demand has been sluggish and there was a need to protect market share. Similarly, additive manufacturers have also implemented discounts in the realm of 3% to 4% into select accounts to reflect the June posted base oil price decreases.
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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