According to data released by the U.S. Energy Information Administration, as of August 2023, year-to-date lubricant offtake showed a sharp 21 percent drop compared to levels seen in 2022.

“We expect the year to end down about 19 percent versus 2022, and down by 29 percent compared to the average of the five pre-pandemic years of 2015-2019,” Hay noted, adding that “this year, we didn’t observe the typical peak season” between mid-February and mid-May.

Part of the reason for the demand downturn in the first part of the year was inventory overhang from the end of last year that continued into this year because buyers had built up stocks when supply was short, but this situation reversed this year.

Monthly production also fell as a response, with a reduction of 7% through August over 2022 levels noted. “But stocks remained elevated in response to weak demand,” she explained.

Looking at fluctuations in the Purchasing Managers’ Index over the year helps in part understand why demand remained sluggish. For most of 2023, the PMI index hovered below 50. A PMI index over 50 represents growth or expansion within the manufacturing sector of the economy, compared with the prior month, but a reading under 50 represents contraction. “Half of lubricant demand is for industrial use, so if there is a big dip in the PMI reading below 50, it means it is in contraction territory,” Hay explained. “Another 25% of lubricant demand goes into Original Equipment Manufacturers, so there is also going to be an impact there.”

On the bright side, one factor that may have allowed U.S. base oil suppliers to keep inventories in check throughout the year was healthy export demand, with a 7% increase of exports to Mexico realized over 2022 levels, according to the ICIS Supply and Demand database. “This increase can be explained by low export prices from the U.S.,” Hay said. Mexico is the largest market for U.S. exports, and volumes have steadily increased over the past several years, with volumes in 2023 estimated to exceed those shipped in 2019 by 22%.

However, in late October, exports to Mexico came to an almost complete standstill as the Mexican government imposed new regulations that require a license to import refined products – among them, base oils and lubricants. The new rules were aimed at curbing illegal fuel practices, which were depriving the government of substantial tax revenue, and were also expected to put a crimp in U.S. exports of light base oils used for fuel blending purposes.

At the same time, U.S. base oil plant operating rates fluctuated throughout the year, depending on whether refiners favored diesel output or base oil production, and the decision mainly hinged on the price of fuels. Compared to 2019, base oil prices were still relatively healthy in the post-pandemic period, but they have been more sensitive to the Russia-Ukraine war impacts due to sanctions on Russian gasoil and diesel exports, Hay said.

Michael Connolly, ICIS’ principal analyst, refining, noted during the same presentation that refineries were generally running at high rates to produce more diesel or gasoline due to elevated prices. During the last part of 2023, however, diesel cracks subsided, although they still remained relatively high.

In February 2022, the Russian war on Ukraine began and this led to a shortage of gas oil globally and to skyrocketing prices, as several countries imposed sanctions on Russian gasoil exports, Connolly explained. These developments had a significant impact on the production of base oils, as base stocks compete at the refinery level with gasoline and diesel, which are produced from the same vacuum gasoil feedstock.

“Basically, what this means is that base oils margins need to be higher than the fuel cracking margin to encourage base oil producers to produce enough base oils to supply the market and meet base oil demand,” Connolly elaborated.

However, even though there was weak demand on the base oils side this year, there were still very strong margins, and this encouraged base oil producers to maintain base oil output levels.

A number of new refineries and expansions coming on stream during the year were expected to relieve some of the gasoil price pressure. “The addition of this new capacity globally is key to bringing gasoil prices down,” Connolly emphasized. While some projects have come to full fruition and units have started up in 2023, some were anticipated to be delayed from their original startup dates.

Among the projects that were expected to come online in 2023, Connolly mentioned the expansions at ExxonMobil’s refinery in Beaumont, Marathon’s in Galveston Bay and Valero’s in Port Arthur in the U.S. In the Middle East, Kuwait National Petroleum Co. in Al Zour, Kuwait, has partially started up and was producing some gasoil. Saudi Aramco’s refinery in Jazan, Saudi Arabia, was also understood to be undergoing the start-up process.

Some projects were expected to start up in the second half of 2023 or early 2024. This includes a new OQ8 Refinery in Oman, a 50-50 joint venture between Oman Oil Co. and Kuwait Petroleum International; the new Hindustan Petroleum unit in India, and two new refineries in China: the Hebei Xinhai Group unit and the Shandong Yulong refinery.

Among those projects whose startup has been delayed, Connolly mentioned a new Pemex refinery in Dos Bocas, Mexico, which was now expected to start up by the end of the year, according to Reuters, and a new Dangote refinery in Lekki, Nigeria, which is set to start producing diesel and jet fuel in January 2024, according to media reports.

The new refining capacity startups will allow the gasoil crack margins to continue to ease in 2024 compared to where they have been this year, and this will also help relieve some of the pressure for base oil margins to remain so high, Connolly noted. During her concluding remarks, Hay underscored that macroecomic factors will continue to play a role on lubricant demand, and that participants should also keep an eye on the PMI, as consistent contraction in new orders is a good indicator of future activity. She also pointed out that export dynamics will likely shift, as the new import restrictions imposed by Mexico may permanently alter the flows of light grades out of the U.S., creating downside to demand for U.S. base oil in 2024.