Commanding almost as much interest as the Summer Olympics in Tokyo, base oil supply and demand continued to be closely watched by market participants, as it was mainly these fundamentals that have driven prices up for the last several months. However, participants enjoyed a respite from the relentless climb in pricing as values were generally stable this week.
The most recent round of posted price increases, which went into effect between June 15 and July 1, represented the seventh upward adjustment since December 2020, while spot prices continued to hover at historical highs. July was an exception in that no fresh price increase initiatives emerged.
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Supply remained extremely tight, while demand has been unusually healthy for this time of the year, even though requirements typically weaken when the summer driving season starts to wind down. However, that has not been the case this year–orders continued to pour in and suppliers were finding it difficult to keep up with shipments. A couple of sources did acknowledge that this week had been slightly quieter, but they attributed it to participants enjoying the last few days of vacation before the start of the school year.
While production rates have been ramped up and most refineries were running at an improved rhythm, unexpected incidents earlier in the year such as the freezing winter storm in February, refinery fires and extended turnarounds had forced a number of producers to place customers on allocation. Many suppliers were still trying to catch up with orders, and purchases made this week might not be shipped until September, sources admitted.
The API Group I was likely the most strained segment, with bright stock still described as a hidden treasure that was difficult to find and the 230-250 vis cuts also in high demand. Suppliers reiterated that they were very tight on all grades and may not be able to start building inventories until the end of the year. “Sales have just been too good,” a source emphasized.
Group II base oil availability remained snug, with suppliers focusing on meeting contract commitments. Gone were the days when substantial volumes were earmarked for export to India and the Middle East – at least until producers are able to meet all domestic obligations and build inventories.
Mexico is one of the destinations that traditionally receives significant volumes of base oils from the United States, but given the current tightness, there have been fewer cargoes available for shipment there.
Brokers and traders have scoured the market for base oils in other countries, with both light and heavy-viscosity grades expected to arrive in coming weeks from faraway places such as South Korea. There was speculation that prices had been competitive as these base stocks were expected to be sold as diesel extender. Some rerefined product has also been added to the line-up of shipments headed to Mexico. Additionally, an 8,000-10,000-metric ton cargo was being discussed for shipment from the Baltic Sea to the U.S. Gulf in early August. Base oils of Chinese origin were heard to have been offered for shipment to South America.
The Group III segment has enjoyed plentiful attention as well, particularly as many Group II cuts used in certain applications such as motor oil remained scarce. This has led to a tightening of the Group III sector and of the 4 centiStoke grade in particular.
A lengthening of supply in other regions such as Asia and Europe may start to weigh on market sentiment in the U.S., with buyers starting to take a more cautious position in terms of purchase volumes and acceptable price levels.
On the naphthenic base oils front, similar conditions to those seen on the paraffinic side prevailed. Snug supply, healthy demand and recent production outages continued to impact prices. A majority of naphthenic producers implemented 30-cent per gallon increases between July 5 and July 12 and continued to monitor market conditions to decide whether further adjustments would be necessary.
Naphthenic base oil availability might be slightly tightened by a minor turnaround at Cross Oil’s Smackover, Arkansas, base oil plant. The maintenance will last approximately 12 days, starting on September 13, and will involve a catalyst change. The unit can produce 5,000 barrels per day of naphthenic base oils, according to Lubes’n’Greases’ Guide to Global Base Oil Refining.
Meanwhile, manufacturers of lubricants, greases, additives and other finished products attempted to transfer some of the raw material price increases down the supply chain. They announced a round of markups of between 5% and 18%, with effective dates peppered between late July and August. Participants underscored that it was difficult to catch up with all the base oil markups that have taken place since December of last year.
Other difficulties that downstream manufacturers were dealing with were related to transportation delays and a shortage of additives, which have caused temporary shutdowns at blending plants. The increase in coronavirus infections in the U.S. linked to the Delta variant was also seen as a potential disruptor of manufacturing operations if many employees found themselves forced to stay away from their workplace or new restrictions were imposed.
Upstream, sliding crude oil values took some of the pressure off of base oil pricing. Crude oil prices settled lower on Tuesday as concerns over new coronavirus constraints, combined with slowing factory activity in key markets such as China, where there was a resurgence of cases, dampened earlier expectations of a healthy demand recovery. U.S. manufacturing activity also showed signs of slowing.
A Reuters survey showed that oil output from OPEC+ rose in July to its highest since April 2020, which also weighed on crude numbers. Both West Texas Intermediate and Brent saw 3% drops on Monday. But the Reuters poll also indicated that U.S. crude and product inventories likely declined last week.
There have been discussions about whether the new bipartisan infrastructure bill proposed by President Joseph Biden’s administration, which includes climate-change related elements such as electric vehicle incentives, would threaten the U.S. oil industry. Analysts said that it probably will not. “In fact, oil refiners might benefit from the record investment pouring into rebuilding the U.S.’ highways and transportation infrastructure, which should increase residue demand in the mid-term,” OilPrice.com reported.
West Texas Intermediate (WTI) September futures settled at $70.56/barrel on August 3, from $71.65/bbl on July 27.
Brent futures for October delivery settled at $72.41/bbl on the CME on Aug. 3, from $74.48/bbl for September futures on July 27.
Light Louisiana Sweet crude wholesale spot prices were hovering at $71.81/bbl on Aug. 2, from $72.55/bbl on July 26, 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.