Despite a setback in terms of business reopenings in some states, activity in the United States base oils market appeared to have picked up compared to two months ago, but was still off pre-pandemic levels.
A majority of polled suppliers reported a pick-up in requirements in June and July. “Volumes are not back to normal, but at least we are getting orders from the vast majority of our customers at this point,” a producer noted.
“Domestic demand has been spotty. Sales are still running behind, but gradually getting better. I don’t think we can make up for the lost demand over the last three months,” another source commented.
One sector that has been surprisingly doing well is exports to Mexico, despite the fact that the number of coronavirus infections in the neighboring nation was not receding. “It sort of doesn’t make sense from what the news reports about Mexico,” a source remarked. Mexican demand has climbed, with many shipments moving south of the border over the last six weeks.
Most of the Mexican requirements entailed lighter grades for fuel blending, but some heavier grades for industrial applications have seen renewed buying interest as well. However, suppliers remained cautiously optimistic that demand would remain steady. “Demand is up for now, but this may be a temporary blip,” a source noted, while another remarked that “as long as Mexico does not shut down again due to COVID-19, I would think demand will continue to chug along.”
Although base oil and lubricant suppliers have seen some encouraging signs in terms of general demand, the pace seemed to slowing as the market entered the second half of July, with August prospects described as uncertain. A supplier agreed that June had been “a decent month for us, but July is not looking as good. The market is tight for now, but I expect surpluses to appear in August.”
While large volumes of U.S. product, particularly Group II base oils, moved to overseas destinations such as India in June, a saturation in those markets may lead to a slowdown in exports and swelling supplies on the domestic front.
A great deal of the market’s attention was centered on developments in the automotive industry. U.S. auto plants have restarted or ramped up operations since a near standstill in March, during the dawn of the pandemic.
Fiat Chrysler, Ford Motor, General Motors, Honda, Toyota and other manufacturers were heard to be running almost all of their plants on two or three shifts. “The revival has helped automakers restock depleted dealer lots and cater to a rebound in demand that has been driven in part by people who feel they need a car for social distancing during the pandemic. Car sales in June were down from a year ago but were more robust than what analysts had expected,” The New York Times reported.
However, concerns that the virus might spread among workers has led to high absenteeism, while financial losses have resulted in furloughs and layoffs. If schools do not reopen for in-person classes and businesses continue to allow employees to work from home, new car sales and driving will again slump.
Fuel consumption has already seen sharp drops since the pandemic started, and the situation has not improved dramatically, sources said.
Another segment that has been suffering from the slowdown in people’s mobility is the aviation industry, dragging down jet fuel and aviation lubricants demand.
United Airlines said last week that it was cutting back on the August flight schedule it announced earlier because travel demand was sliding again as coronavirus cases surged across much of the country, another article in The New York Times reported.
United management told employees this week that it expected to fly about 35 percent as many flights next month as it did last August. Demand for flights started to fall as the recent increase in cases nationwide – and the associated travel and quarantine restrictions – made flying less appealing.
Base oil producers had dialed back production rates at their plants to reflect the drop in consumption over the last three months, but a number of them have started to ramp up rates on improved demand. It was heard that HollyFrontier and Excel Paralubes would be increasing operating rates, while rerefiners Heritage-Crystal Clean and Safety-Kleen have also raised output.
The gradual demand revival, both on the domestic and export fronts, has also resulted in a tightening of supplies, with the 600-vis grade appearing to be particularly snug, and existing stocks consistently said to be falling, according to sources. “I don’t see large inventories out there at the current time,” a market participant concurred.
Paraffinic base oil posted price increases have been by and large implemented between June 15 and July 1, while discounts and temporary adjustments seem to have disappeared.
On the naphthenic base oils front, no fresh increase initiatives emerged, following the 20 to 25 cent-per-gallon markup by Cross Oil on pale oils communicated two weeks ago, and scheduled to go into effect on July 16. Other naphthenic producers were heard to be still evaluating the market and considering price revisions.
Stable to firm base oil prices were supported by current crude oil and feedstock costs. Oil prices continued to hover at the $40 and $43 per barrel price level for West Texas Intermediate and Brent, respectively, with small fluctuations seen over the last month.
Crude futures retreated on Tuesday over concerns about a potential increase in OPEC+ production coinciding with new restrictions to stem surging U.S. and Asian coronavirus cases that could dampen a recovery in fuel demand.
California reversed course on business and school reopenings, following similar moves in other states such as Florida and Texas, while renewed rules were also introduced in Asia and Australia.
Discussions at a technical committee meeting of OPEC+ members later this week were expected to focus on the possibility of relaxing some of the output curtailments as of August.
On Tuesday, July 14, August WTI futures settled at $40.29 per barrel on the CME/Nymex, and had closed $40.62/bbl on July 7.
Brent futures for September delivery closed at $42.90/bbl on the CME on July 14, from $43.08/bbl on July 7.
Light Louisiana Sweet crude wholesale spot prices settled at $42.06/bbl on July 13 and had closed at $42.01/bbl on July 6, according to the Energy Information Administration.
Vacuum gas oil was trading at August WTI plus $5.75/bbl (or $46.04/bbl) on July 14, according to OPIS/PetroChem Wire assessments.
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.
Historic and current base oil pricing data are available for purchase in Excel format.