Before the COVID-19 pandemic hit, the global base oil market was battling oversupply. “Now, nearly a year of lower refinery run rates has constrained availability globally and sent base oil pricing higher at a time when downstream blenders are still dealing with the ramifications of the coronavirus on their own businesses,” Hay observed.

As other conference speakers noted, refineries have slashed run rates to deal with plummeting fuels demand, constricting vacuum gas oil feedstock supply to base oil plants. Median run rates languished around 75% last year, compared to 90% in 2019, according to Hay.

Over the past year, 14 refineries have closed, seven of them in North America. Two of the shuttered facilities – Shell’s refinery in Singapore and the PBF Energy plant in Paulsboro, New Jersey – have API Group I base oil units that will continue to operate, Hay said. Group I stocks have seen particularly tight supply conditions, along with bright stock and heavier-viscosity cuts of Group II oils.

Run rates at the remaining refineries are still about 8%-10% below normal, which Hay expects will last through the end of the first quarter.

Early into 2021, tight base oil supply conditions overshadow rebounding global demand. United States suppliers seem able to meet demand from domestic and contract business with little to nothing left for export. Spot buyers have very limited options, Hay remarked. However, lighter-viscosity cuts are flowing freely enough for some of these oils to reach export markets.

In fact, export business has offset the slow domestic market for U.S. producers. The global market remains tight, and export volumes have exceeded 2019 totals each month since August, she said, citing U.S. Energy Information Administration data.

Export prices have risen to record highs, surpassing domestic prices for the first time since ICIS began reporting, Hay said. Prices fluctuated $1.30 per gallon between the highest and lowest points of 2020. Previously, the largest difference within a single year was 71 cents/gal, when crude prices rebounded in 2017 from a slump in 2015-2016.

There is little relief on the supply horizon. In February and March, 22% of U.S. paraffinic production capacity and 26% of naphthenic capacity is expected to be offline. “That’s impactful because U.S. refiners account for 44% of global naphthenic refining capacity,” said Hay.

As a result of these conflicting and fluctuating market forces, base oil prices have been highly volatile since the pandemic began, with eight price moves among U.S. producers within a year. Typically, posted prices only move two or three times a year. Hay noted the challenges such conditions present for lubricant buyers trying to keep up with the price swings.

During their lowest point in 2020, posted prices plummeted 24% for Group I, 38% for Group II and 16% for Group III. Group II tends to be oversupplied in the U.S. and therefore saw the steepest decline, Hay explained.

Prices have since regained or surpassed pre-pandemic levels. Group I climbed back 37%, and Group II leapt up 68%, mainly because it had fallen the furthest, Hay said. Group III gained 37%, as shortages pushed prices for these grades beyond pre-pandemic levels.

Global supply remains tight. “We anticipate that [refinery run] rates will gradually recover over the next three years, and the gasoline and diesel market should largely return to normal by 2022, although without the previously expected growth we would have seen. Jet fuel is going to take longer and will continue to weigh on rates until it does return,” Hay concluded.