Some buyers continued to purchase hand-to-mouth on concerns that base oil prices might be adjusted down, and they would be caught holding pricey inventories. However, climbing crude oil and feedstock prices this week have started to exert upward pressure on pricing.

Additionally, steeper diesel values might encourage refiners to stream more feedstocks into fuel production in detriment to base oil output, leading to tighter supply conditions. A number of producers have also increased API Group III production and reduced Group II output on earlier concerns that Group III import shipments would be disrupted, and Group II supplies were lengthening. There has also been an increase in demand for lubricants produced with high performance base stocks in the Group III category.

Crude oil futures jumped by over $1 per barrel on Tuesday as analysts factored in escalating tensions in the Middle East after the U.S. launched retaliatory airstrikes against Iran’s Islamic Revolutionary Guard Corps and allied militias in Iraq and Syria. Futures had shown a significant drop in previous sessions on concerns about slowing demand. At the end of trading on Tuesday, prices gave up some of the gains on talk of a possible cease-fire in the Israel-Hamas war.

On Tuesday, Feb. 6, West Texas Intermediate (WTI) March 2024 futures settled on the CME at $73.31/barrel, compared to $77.82/bbl on Jan. 30.

Brent futures for April 2024 delivery settled on the CME at $78.59/barrel on Feb. 6, from $82.87/bbl for March futures on Jan. 30.

Louisiana Light Sweet crude wholesale spot prices were hovering at $75.81/barrel on Feb. 5, from $79.80/bbl on Jan. 29, according to the Energy Information Administration.

The shipping disruptions linked to Houthi attacks on commercial vessels in the Red Sea continued but did not seem to directly impact base oil shipments to the Americas. However, cargoes moving from the Middle East to Europe, and from that region to India have been rerouted around the southern tip of Africa to avoid having to traverse the Suez Canal, adding time and cost to the voyage.

Even though domestic demand was anticipated to pick up over the next few weeks, U.S. suppliers were still eager to finalize export business to keep inventories in check. Spot export prices for Group I and Group II grades have slipped by a few cents to about 10 cents per gallon. A 1,400-metric ton cargo was discussed for prompt shipment from Houston, Texas, to Rio Haina, Dominican Republic. A 5,000-ton lot was expected to have been shipped from Pascagoula, Mississippi, to Amsterdam-Rotterdam-Antwerp at the end of January to the first week of February. A second cargo was lifted from the U.S. Gulf to Egypt in late January. About 5,000 tons to 7,000 tons were quoted for prompt shipment from Houston to Mumbai, India.

There was some competition with Asian suppliers for business into West Coast South America, as prices were deemed attractive. About 4,000 tons of base oils were expected to be shipped from Ulsan, South Korea, to WCSA in late February to early March, and other discussions were ongoing.

Buying interest from Brazil was fairly steady on account of recent production outages in that country and sporadic output issues at refineries there, but it has declined somewhat as a key producer appeared able to deliver all contract volumes. Lower domestic prices in Brazil made U.S. prices less competitive. Nevertheless, a 3,000-ton lot was expected to have been shipped from Port Arthur, Texas, to Santos in late January.

One of the main factors playing a role in U.S. supply levels was expected to be future exports to Mexico. Volumes moving into the neighboring country were expected to drop substantially as the Mexican government has imposed new restrictions on refined product imports to deter illicit fuel practices. Among the requirements, importers need to apply for a license and justify base stock imports by proving they will be used for lubricants. Sources also explained that before the decree was imposed last October, some diesel was imported and categorized as lubricant to avoid duties on fuel imports.

Vast quantities of U.S. light-viscosity base oils had moved to Mexico over the last few years to be used as fuel extenders, but this was anticipated to be restricted, leading to a lengthening of light-viscosity Group I and Group II grades in the U.S. Participants also noted that many other products such as finished lubricants, greases and raw materials that would never be used as fuel extenders have also been included in the list of products that require a special import license. Sources said that a number of one-year licenses had been granted but going through customs had been a problem as “custom agents are not being cooperative in handling the applications” and that base oil and lubricant shipments had suffered delays. “Some big blenders still have inventories in Mexico, but will soon have to start replacing these,” a source commented. This would likely lead to an uptick in buying interest for U.S. base oils in the coming weeks.

Group III availability was deemed ample in most regions, and the U.S. was no exception. Shipments from Asia and the Middle East were expected to be on their way to be delivered in February. A large parcel was heard to have been shipped from Sitra, Bahrain, to the U.S. Gulf in the second half of January. A second parcel of 5,900 tons was likely to be shipped from Sitra to Houston in mid-March. Asian cargoes were also expected to face fewer difficulties in reaching the U.S. Gulf Coast than in previous weeks, as a backlog of vessels waiting to cross the Panama Canal was slowly being cleared.

On the naphthenic base oils front, a fairly balanced supply and demand scenario and climbing Brent crude futures lent support to light viscosity base oil prices, but the heavy-viscosity grades were exposed to downward pressure because requirements have been seasonally soft. However, demand from the asphalt and rubber modifier markets was expected to “be booming by Q2” and will likely tighten supplies. Shipments of U.S. products to Europe, Asia and Latin America – Brazil in particular – were also helping keep pale oil inventories from bulging.

Furthermore, a scheduled maintenance program at Calumet’s plant in Princeton, Louisiana, which was completed in late January, and an earlier turnaround at San Joaquin Refining’s plant in Bakersfield, California, last December had caused a tightening of supplies as both producers were rebuilding inventories.

A third producer had experienced a brief shutdown in mid Jan. due to extreme winter temperatures, but the plant was heard have been restarted. No other output disruptions were reported this week. The San Joaquin refining plant was also running well and had not been affected by the heavy rains that battered California over the weekend.

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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