The base oil market remains tight following unplanned production outages on the United States Gulf Coast, coupled with brisk domestic and export demand. Participants were keeping an eye on a hurricane forming in the Caribbean, which was expected to make landfall on the U.S. Gulf Coast later this week, as a number of base oil plants could potentially be affected by the storm.
The tight supply conditions and current crude oil and feedstock values have led to a round of paraffinic posted price increases, which became effective between Sept. 7 and Oct. 1, and lifted prices by 15, 20, 25 and 30 cents per gallon, varying according to the grade and the supplier.
Supply of most grades in the paraffinic base oil segment was described as limited as producers focused on fulfilling contractual commitments, leaving very little product for spot business.
Sources said that ongoing output outages such as Excel Paralubes’, following Hurricane Laura, had tightened domestic availability of API Group II grades and restricted what producers could offer for export transactions.
Group I availability has also dropped as demand was healthy, particularly from the industrial, agriculture, marine and heavy-duty oil segments, and domestic production capacity was more limited than for other grades.
Refineries have also been running at reduced rates because of thin distillate margins, which has affected base oil output levels.
There was healthy buying interest for Group I and II cargoes from India, Brazil, Colombia and Mexico, but suppliers appeared unable to meet most of these requirements. Only one cargo was heard to have been loaded ex-U.S. Gulf for India in September, but there appeared to be very little additional product on hand and prices have also climbed, making the arbitrage less feasible. Some smaller cargoes of Group I, II and III grades have been concluded to South America.
Group III supply and demand was deemed mostly balanced, although the lighter grade was said to be less readily available. Most Group III barrels continue to be imported from South Korea and the Middle East. Port congestion at Middle Eastern ports in recent months had caused some shipment delays, but the situation has since improved.
Participants expected fundamentals on the paraffinic side to loosen up slightly in November, when domestic demand traditionally tends to soften and suppliers also start to reduce inventories. This remained to be seen though, as 2020 has been “anything but typical,” a source commented.
Furthermore, while the Excel Paralubes near Lake Charles, Louisiana, plant was heard to be still off line, there were expectations that it would be restarted before the end of the month, provided Phillips 66 were able to restart its refinery and supply feedstocks to the base oil plant. Excel Paralubes was understood to have continued shipping contract cargoes under allocation from its storage facilities, but those barrels were heard to have been depleted, and it may take some time once the producer restarts output to build inventories again.
Calcasieu Refining’s 135,500 barrels per day refinery in Lake Charles, which supplies some feedstock to both the Excel Paralubes plant and the Chevron base oil plant in Pascagoula, Mississippi, was reportedly shut down and was expected to remain closed until further notice due to unfavorable market economics.
There was also concern that another tropical system forming in the Caribbean this week, Hurricane Delta, which appeared on track to reach the U.S. Gulf Coast by Friday, could potentially impact base oil facilities located in coastal areas from Texas to Florida, including those of Motiva, ExxonMobil, Excel Paralubes and Chevron, among others.
On the naphthenic base oil side, Cross Oil communicated a price increase of 25 cents/gal for its low viscosity base oils and 15 cents/gal for its high-vis oils last week, which will go into effect on Oct. 13. The steeper increase for the lighter grades reflected the fact that those cuts were less abundant.
Demand of naphthenic base oils remained quite steady throughout the last several months, despite the impact of the pandemic, according to suppliers, and prices have been adjusted on a case-by-case basis when needed. Producers were considering general price adjustments, but no additional communications had emerged by the time of writing.
The markups were prompted by the difficulties refiners were facing as the distillate market has weakened and crude oil costs remained high, while refiners continued to adjust refinery run rates to optimize production.
Upstream, crude oil futures rallied on President Trump’s improving health reports, which also offset some concerns about the growing number of coronavirus cases worldwide that could result in weaker crude oil demand.
The U.S. economy was still expected to face negative impacts from the coronavirus if the pandemic is not controlled. A renewed rise in infections might again “more significantly limit economic activity, not to mention the tragic effects on lives and well-being,” said Federal Reserve Chairman Jerome Powell Tuesday at the National Association for Business Economics annual meeting, according to a CNN.com article.
At the same time, President Trump tweeted that he would end discussions with Democrats over a stimulus package, leading to a sharp drop on Wall Street.
On Tuesday, Oct. 6, November WTI futures settled at $40.67 per barrel on the CME/Nymex and had closed at $39.29/bbl on Sept. 29.
Brent futures for December delivery closed at $42.65/bbl on the CME on Oct. 6, from $41.03/bbl for November futures on Sept. 29.
Light Louisiana Sweet crude wholesale spot prices settled at $40.02/bbl on Oct. 5 and had closed at $41.97/bbl on Sept. 28, according to the Energy Information Administration.
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