Signs emerged that the pandemic-related lockdowns in China started to ease and the situation might be improving, feeding hopes of a demand recovery in that key base oil market. Asian base stock supply was strained for most of April, but it appeared to have loosened up as plants have resumed production following turnarounds and price uncertainties were keeping some players away from the trading scene.
The Chinese government had imposed strict lockdowns in major cities like Shanghai to curb the spread of COVID-19, and this led to the reduced mobility of millions of people and a slump in transportation and driving activity. Automotive sales also fell significantly in April. The limitations on the population’s activities had also fueled concerns about crude oil demand in China – the world’s second largest consumer of crude oil – and this had impacted oil futures. However, if the lockdowns and other restrictions get lifted, suppliers expected to see an uptick in fuels and lubricants consumption, along with renewed interest in imports. At the same time, participants observed Chinese base oil cargoes being exported to destinations such as Singapore, possibly to fill a Group II supply gap there and maintain balanced inventories at home.
Many market uncertainties also stemmed from the fact that crude oil prices remained volatile due to the ongoing Russian invasion of Ukraine. As a deterrent to Russian aggression, European Union members were considering the ban of crude oil and natural gas imports from Russia, depriving the country of one of its main sources of income. While the EU has not reached a decision yet, Germany planned to stop importing Russian oil by the end of the year even if the EU fails to agree on a general ban.
Many countries have already applied financial sanctions against Russia, and this has impacted crude oil exports because traders have been reluctant to handle Russian oil to avoid any implications. The decrease in Russian oil trading has resulted in tightening global supplies, and some countries that rely heavily on crude imports, such as Japan, have felt the consequences of the reduced supply and skyrocketing prices.
Aside from dealing with climbing production costs, base oil producers were also facing pressure at the refinery level from competing fuel prices. A number of refiners were favoring diesel and jet kerosene production to the detriment of base oil output. The light grades were particularly vulnerable to this situation, sources noted.
In South Korea, an explosion that sent eight workers to the hospital rocked the S-Oil refinery in Onsan industrial park on May 19, according to local media reports. The incident occurred while the refinery was processing crude oil, but the cause of the explosion has yet to be determined. It was also unclear at the time of writing whether base oil production at the site would be affected. The Onsan refinery houses a 23,000 barrels per day API Group II and 16,900 bbl/day Group III unit.
Meanwhile, India was experiencing a power supply crisis as the population was turning up their air conditioners amid a heatwave and many workers returned to offices and factories given the relaxation of pandemic-related measures.
Domestic suppliers continued to meet a large portion of Indian base oil demand with locally-produced base oils, as imports from the United States and the Middle East have dropped on the back of healthy domestic consumption in those regions. Indian buyers have therefore been on the lookout for more regional imports, such as products from South Korea. Several shipping fixtures and inquiries were mentioned in connection with this business, but South Korean suppliers were also actively pursuing opportunities in more distant destinations such as Europe, the U.S. and South America, where product tightness and prices have escalated.
South Korean suppliers have been busy concluding shipments or making inquiries to ship product to several different destinations. It was heard that 2,700 metric tons of base oils were looking to be moved from Ulsan to India and Jebel Ali, Dubai, United Arab Emirates, at the end of May or first week of June. About 3,000 metric tons were expected to be shipped from Ulsan to Chennai, India, at the end of May or early June. A 4,000 metric-ton cargo was being considered for shipment from Daesan and/or Pyongtaek to West Coast India and/or Hamriyah, Sharjah, United Arab Emirates, in the second half of June. A small parcel was being discussed for shipment from Yeosu to Nha Be, Vietnam, in the second half of May. A 5,100-metric-ton lot was on the table from Yeosu to Ho Chin Minh, Vietnam, and Singapore in mid-June. Another base oil parcel was expected to be shipped from Yeosu to Bangkok, Thailand, in early June. Two thousand metric tons were also likely to ship from Ulsan to Tanjung Priok, Indonesia, the first week of June. About 10,000-metric-tons were in discussions to be lifted from South Korea to the Caribbean in late May or June.
In other shipping discussions, a 8,600-metric-ton cargo was expected to cover Dumai, Indonesia, to Rotterdam at the end of May. A 4,200-metric-ton lot was discussed for Singapore to Jebel Ali in late May. A 14,500-ton combined cargo of paraxylene and base oils was mentioned as slated from Singapore to Llanyungang, Guangzhou and Beihai, China, in late May. Similarly, a 17,700-metric ton combined cargo was also discussed from Singapore to Zhuhai and/or Zhenjiang and Shanghai, China, for May 20-24 lifting. A major Singapore producer was expected to ship 6,000 metric tons of two base oil grades from Singapore to Rotterdam in late June.
Improved supply levels of Group I base oils were observed in Southeast Asia, with Thai producers offering additional bright stock and heavy grades this month. The heavier grades were less readily available than the lighter grades, however.
Group III supplies were also more plentiful with the return to full production of a couple of South Korean units and improved supply levels in the Middle East. Group II availability appeared to be the most limited of all categories, with production hiccups at regional plants and strong demand leading to the tighter conditions.
Despite an easing in supply levels, Asian consumers were keeping an anxious eye on spot indications, as they continued to be exposed to upward pressure due to current supply/demand conditions and steep feedstock and crude oil prices.
Spot base oil prices in Asia were assessed as stable to firm this week, with improved availability levels allowing for steadier pricing, despite ongoing pressure from high feedstock prices. The ranges portrayed below reflect bids and offers, as well as deals and published prices widely regarded as benchmarks for the region.
Ex-tank Singapore prices were higher week on week as a producer has increased its ex-tank indications. The producer’s Group I SN150 was heard to have edged up by $40/t, and the SN500 and bright stock by $30/t. Prices for the producer’s Group II base oils jumped by $90/t.
Ex-tank Singapore spot prices for the Group I solvent neutral 150 grade were assessed higher by $10/t at $1,140/t-$1,170/t, and the SN500 was assessed up by $20/t at $1,320/t-$1,370/t. Bright stock was holding at $1,440/t-$1,480/t, all ex-tank Singapore.
Prices for the Group II 150 neutral were steady at $1,260/t-$1,300/t, while the 500N was higher by $10/t at $1,350/t-$1,400/t, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was holding at $1,040/t-$1,080/t, but the SN500 moved up by $20/t to $1,150/t-$1,190/t. Bright stock was also higher by $20/t at $1,250/t-1,310/t, FOB Asia.
The Group II 150N moved up by $40/t to $1,190/t-$1,230/t FOB Asia, and the 500N and 600N cuts were higher by $40/t as well at $1,240/t-$1,300/t, FOB Asia given that these grades were tighter in the region.
In the Group III segment, prices have firmed week on week. The 4 centiStoke was assessed higher by $10 at $1,590-$1,630/t, and the 6 cSt was up by $20/t at $1,580/t-$1,620/t. The 8 cSt grade was also revised up by $20/t to $1,310-1,340/t, FOB Asia, all for fully approved product.
Upstream, crude oil futures showed unusual behavior in that Brent was trading below West Texas Intermediate. For several years, WTI crude, the U.S. benchmark price, has traded at a significant discount to Brent crude, the international price. Market observers said that Brent prices have been held down by several factors having to do with international politics and economics, according to an online article in Barron’s. The EU has not been able to come to agreement on a ban on Russian oil and the possibility of a ban had previously caused prices to rise.
Oil prices fell significantly on Wednesday, reversing an upward trend in previous sessions, as concerns eased regarding a potential global supply crunch after government data showed U.S. refiners ramped up output, and as equity markets fell on inflation worries.
On May 19, Brent July futures were trading at $106.70 per barrel on the London-based ICE Futures Europe exchange, from $106.14/bbl on May 12. A year ago, Brent was trading in the high $60s/bbl.
Dubai front month crude oil (Platts) financial futures for June settled at $102.47/bbl on the CME on May 18, from $101.78/bbl on May 11. (CME note: Settlement prices on instruments without open interest or volume are provided for web users only and are not based on market activity.)
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
Lubes’n’Greases shall not be liable for commercial decisions based on the contents of this report.
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