It has been another active week in the U.S. base oils market, with no signs of the “dog days of summer” so typical of years past. Demand held at steady levels, making it difficult for suppliers to catch up on orders and build inventories. Spot prices continued to be exposed to upward pressure due to the tight market conditions, but slightly improved availability in certain segments has allowed for values to stabilize.
One of the categories that has suffered from the tightest conditions was the API Group I sector. Following several planned and unplanned outages at Group I plants in the first and second quarter of the year, most suppliers were focusing on fulfilling back orders as inventories have been depleted and demand has not let up.
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“It’s a sold-out situation for any volume over the “contract” level – and sometimes that even can’t be met,” a source commented, with suppliers struggling to manage available barrels of base oil to meet all the requirements. “Orders received now might not be delivered until September,” another source noted. The current tightness was not expected to ease until the fourth quarter. A lack of qualified drivers and of trucks and railcars was also hampering the smooth running of business.
However, as operating rates have been ramped up and production was back at normal levels at most plants, there appeared to be improved availability of a number of grades, although bright stock remained limited. Spot price indications of Group I grades were heard to have largely stabilized, instead of moving up as in previous weeks.
Suppliers in other regions have been looking for opportunities to move product to the U.S. There was keen interest in an offer of a Brazilian cargo, with the possibility that it may end up going to Africa or India also being discussed.
Group II supplies were also described as strained, not only because of contract orders, but also due to increased spot demand for some of these grades to replace Group I cuts that were more difficult and pricey to obtain.
Participants reiterated that both buyers and sellers of most base oils were anxious about not having been able to pad inventories ahead of the Atlantic hurricane season, which started in June. Market players routinely prefer to keep ample supply in storage in case of production disruptions – particularly at Group II plants along the U.S. Gulf Coast – but reinforcing inventories has not been possible this year.
A small number of light viscosity cargoes have been earmarked for export given keen buying interest and attractive pricing, although buyers appeared less willing to acquiesce to the high offer levels than in the first half of the year.
Opportunities to secure cargoes from Asia have surfaced, with at least a couple of cargoes being shipped from South Korea to Brownsville, Texas, from where they were likely to move on to Mexico. There was also talk of South Korean suppliers considering deliveries to other destinations in the Americas, including the U.S. Gulf.
Group III base oils have also been very snug as most supply in the U.S. is imported and there has been a busy turnaround schedule at Asian and European Group III units over the last several months. Additionally, due to the growing trend to use Group III base oils for automotive motor oils to meet stricter emissions and fuel efficiency standards, buying interest in these grades has mushroomed in recent years. A steady influx of Asian and Middle Eastern cargoes was anticipated in coming weeks. Spot prices were slightly higher this week, edging up by a few cents compared to last week, according to sources.
Following paraffinic posted price increases implemented between June 15 and July 1, postings moved up by 15 to 55 cents/gal, depending on the grade and whether the supplier had participated in all the previous rounds of price hikes since December 2020.
On the naphthenic front, availability has also been tight and current conditions continued to impact pricing. Export business remained strong, as there was healthy buying appetite from South America and Asia. The 60, 100 and 750 vis grades were still difficult to obtain for spot business.
The most recent string of naphthenic price increases prompted by strained supply, rising crude oil, transportation and other costs has been fully implemented, with a majority of naphthenic producers putting into effect a 30-cent/gal increase between July 5 and July 12. However, suppliers were still keeping a close eye on crude oil prices, as further jumps would require a re-evaluation of the current price structure, sources said.
In production news, Cross Oil scheduled a minor turnaround at its Smackover, Arkansas, base oil plant that will last approximately 12 days, starting on September 13. The producer hopes to complete a catalyst change during the shutdown. The unit can produce 5,000 barrels per day of naphthenic base oils, according to Lubes’n’Greases Guide to Global Base Oil Refining.
A company source also said that Cross Oil would be announcing a change to credit terms, with the elimination of any extended terms for naphthenic base oil customers.
Valero was heard to have restarted its Three Rivers, Texas, naphthenic base oil plant, following a fire last month. The company’s operations had also been affected by a freezing winter storm back in February, with shipments suffering delays as a result of both events.
Firm crude oil and feedstock prices continued to exert pressure on base oil indications, although a significant price drop last week eased some of the tension. Downstream lubricants, greases and additives manufacturers expressed concern about further base oil price adjustments if crude oil values moved up, as the last few rounds of markups have been difficult to absorb or transfer down the supply chain.
Aside from the price pressure, base oil and additive shortages had forced a number of lubricant manufacturers to lower or idle production and place customers on allocation.
Most lubricants, greases, additives and other finished products manufacturers have communicated increases between 5% and 18% for late July and August implementation. However, participants said that they were still trying to catch up with all the base stock increases that have taken place since December of last year.
This week, crude oil futures remained volatile during the week, but were largely flat on Tuesday on tight supply and improved vaccination rates. However, worries that surging COVID-19 cases worldwide might dampen demand still lingered, capping values.
U.S. producers added rigs for a fourth week in a row for the first time since May, with the number of oil rigs now at its highest since April 2020, but inventories at Cushing, Oklahoma, fell to their lowest levels since January 2020.
West Texas Intermediate (WTI) September futures settled at $71.65/barrel on July 27, from $67.42/bbl for August futures on July 20.
Brent futures for September delivery settled at $74.48/bbl on the CME on July 27, from $69.35/bbl on July 20.
Light Louisiana Sweet crude wholesale spot prices were hovering at $72.55/bbl on July 26, from $72.54/bbl on July 23, 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.
Historic and current base oil pricing data are available for purchase in Excel format.