U.S. Base Oil Price Report


The first signs that base oil demand might be starting to perk up emerged during the week, but it was still too early to ascertain whether this meant that the spring season would bring in solid business, or whether 2024 might be a repeat of 2023, which was characterized by record low consumption levels and precarious pricing, particularly during the second half of the year.

A number of suppliers noted that they had received fresh orders over the week as consumers were expected to have used up most of their inventories since they had not been substantial to begin with. Some sellers were less enthusiastic. “Markets are stable, but like last year, we are not having the increases in demand normally seen for a spring uptick yet,” a source commented. Most buyers had been rather cautious towards the end of the year and had only purchased small volumes to keep daily operations running and avoid a build-up of product. Tax considerations had also promoted this buying strategy.

There was still concern about shipping disruptions in the Suez Canal because of Houthi rebels’ attacks on commercial vessels in the Red Sea. According to sources, aside from attacking several oil carriers and container vessels, the Iran-backed militants fired a missile at a ship carrying oil products for the commodities trader Trafigura last Friday.

Tensions in the Middle East mounted over the weekend as a drone attack by Iran-backed militants in Jordan killed three United States service members and injured others. President Joe Biden was under increasing pressure to respond to the attack given that Iran-backed militants have targeted U.S. military facilities in Iraq and Syria over 160 times since October. Several Republican lawmakers have called for the U.S. to “hit inside Iran directly to send a clear message,” but Biden officials have repeatedly said that the U.S. does not want to go to war with Iran, CNN.com reported. Secretary of State Antony Blinken noted that the environment in the Middle East is as dangerous as it has been in the region “since at least 1973, and arguably even before that,” according to CNN.

Aside from the shipping and geopolitical issues in the Middle East, base oil participants had also been dealing with delays at the Panama Canal as the number of vessels allowed to go through the waterway had been significantly reduced due to low water levels. However, sources said that the situation had improved, and additional vessels had been cleared to cross the Canal. Some shipping companies have found other ways, such as rail transportation, to get products from one coast to the other.

Despite all of these disruptions, and the fact that some of them were indirectly affecting shipments originating in the Middle-East and Asia, there were no product shortages noted. Some suppliers were heard to be absorbing the higher freight rates that were the result of the shipping disturbances. Domestic base oil plants and rerefineries were generally running at top rates and imports of API Group III grades were also readily available. The plentiful availability was placing pressure on base oil values, with some temporary value allowances having been granted last month and expected to be extended into February. However, some refiners may reduce base oil production rates as diesel values have climbed.

Supply of the Group II heavy-viscosity grades was ample, leading to downward spot price adjustments of about 10 cents per gallon, and the price pressure was exacerbated by competitive offers of imported material. Posted prices remained unchanged, however.

Base oil demand was expected to improve as blenders start to prepare inventories ahead of the busy spring production season. In the past, activity has tended to show an uptick by mid to end of February. However, lingering economic uncertainties and sluggish conditions in downstream markets, particularly in the automotive segment, continued to dampen business. Several blenders were understood to be offering discounts to promote orders and protect market share.

Suppliers were on the lookout for export opportunities to keep products in the domestic market from building up. Demand from India, which typically takes significant amounts of U.S. base oils, has weakened, and suppliers have turned their attention to Europe and South America instead. There were discussions to move product to Colombia, Ecuador, and other destinations, but U.S. suppliers had to compete with offers for Asian material.

There was also ongoing buying interest from Brazil, as a key producer was still having difficulties in meeting domestic requirements on a timely basis.

Buying appetite in Mexico was also slowly reviving, with buyers checking on U.S. pricing with the intention of concluding fresh business, although transacted volumes were expected to be much reduced compared to previous years because of stricter documentation required by the Mexican government to import refined products, including base oils. Due to the new regulations, participants expected U.S. exports of light grades used as fuel extenders to be virtually banned from entering Mexico.

However, the implications of the new requirements seemed to not only affect the light-vis base oil grades, but also lubricants and greases. “The list of items subject to the decree and application requirement goes far beyond light petroleum items. Finished lubricants, greases and many additional raw materials and finished products that could never be used for fuel are inclusive in this restrictive decree,” a source explained, referring to information presented at a webinar organized by the U.S. Trade Center at the U.S. Embassy in Mexico. The same source also noted that it is difficult and burdensome to apply for a permit, and although the permits are supposed to be valid for five years, “to date not a single five-year permit was issued, only one-year permits, and a very limited number so far.”

While there had been a backlog of U.S. base oil shipments at the Mexican border waiting for importers to receive import permits, it appears that some have been given the green light to enter Mexico.

There were also expectations that economic uncertainties in Mexico were going to impact base oil and lubricant demand in the coming months. Some of the recent U.S. shipments concluded over the last two weeks were expected to meet the immediate replenishing needs of blenders.

On the naphthenic base oils front, supply and demand remained balanced-to-tight because of recent turnarounds and steady demand for the light viscosity grades. Export demand from Asia, Europe and Latin America also contributed to a domestic tightening of base stocks. However, there was less interest for the heavy viscosity oils because of seasonal patterns, and this was exerting downward pressure on prices.

A scheduled maintenance program at Calumet’s plant in Princeton, Louisiana, which started in early January and was completed a few days before the end of January, and a turnaround at San Joaquin Refining’s plant in Bakersfield, California, last December had resulted in reduced availability of spot cargoes as both producers were rebuilding inventories. A third producer experienced a brief shutdown in mid Jan. due to freezing winter weather but was heard to be up and running.

Base oil prices had fallen in December and early January due to soft demand and falling crude oil prices. Crude oil futures have recovered some of the lost territory, however, due to freezing weather-related production issues in the U.S. and fears of an escalating conflict in the Middle East.

Oil prices climbed on Tuesday following a more than 1% drop the previous session as mounting geopolitical tensions in the Middle East fueled supply concerns. Prices also received a boost from a more positive growth forecast from the International Monetary Fund for the year.

However, gains were capped by concerns about oil demand in China – the world’s biggest crude consumer – as the real estate crisis seemed to be deepening. A Hong Kong court ordered the liquidation of property giant China Evergrande Group this week.

On Tuesday, Jan. 30, West Texas Intermediate (WTI) March 2024 futures settled on the CME at $77.82/barrel, compared to $74.37/bbl on Jan. 23.

Brent futures for March 2024 delivery settled on the CME at $82.87/barrel on Jan. 30, from $79.55/bbl on Jan. 23.

Louisiana Light Sweet crude wholesale spot prices were hovering at $79.80/barrel on Jan. 29, from $77.76/bbl on Jan. 22, 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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