Base oil production in the United States dropped 9 percent in 2019, according to recently released data, as refiners perhaps let some air out of an over-supplied market. Exports – including those to most of the Americas – decreased, and imports swelled as domestic usage remained relatively flat.
Overall U.S. production sank to 60.9 million barrels from 67.3 million in 2018, according to figures released recently by the Energy Information Administration. Paraffinic slumped 12 percent year-over-year, from 57.3 million barrels in 2018 to 50.7 last year, figures show. The bright spot was a respectable 3 percent boost in naphthenic production to 10.3 million last year from 10 million the year before.
The global base oil market has had a significant and growing production capacity surplus for the past several years, and it has squeezed margins enough that refiners have diverted vacuum gas oil, a base oil feedstock, to other uses such as marine fuel and production of diesel, which at least at times have offered opportunity for better returns. Industry insiders said this probably is a partial explanation for the drop in U.S. production in 2019.
“Pricing and margins were challenged, which led to some production adjustments as well as more [feedstock] being made and sold to the VGO market for marine fuels or other gasoil-type applications. A handful of [refinery maintenance] turnarounds were also completed in the second half of 2019.”
Exports to the Americas continue to decline in 2019. Exports to Canada dropped 5 percent last year from 3.2 million barrels in 2018 to 3 million in 2019. Minus Mexico and Brazil, shipments of U.S. base oil to Central and South America fell at a double–digit rate from 7.3 million barrels two years ago to 6.6 million in 2019.
That may have been due to political unrest that struck several Latin American countries last year along with high inflation in the region. Argentina, which had an inflation rate of 54 percent in 2019, only imported 370,000 barrels of U.S. base oil last year, down from 878,000 the year before. The normally peaceful Ecuador saw street protest against austerity measures, and imports of U.S. base oil nosedived from 1.2 barrels in 2018 to 668,000 barrels last year. Chile, considered one of the region’s most stable markets, experienced street protests over government setbacks and witnessed a small decline in U.S. base oil imports, from 891,000 barrels to 866,000.
Base oil shipments to Mexico jumped by 24 percent in 2019, from 10.2 million barrels to 12.7 million. One industry veteran, who spoke on background, said a significant portion of U.S. base oil imported to Mexico gets used as diesel.
Roberto Rangel Gutierrez, marketing researcher and analysis consultant director for Mexim Consulting, said the increase isn’t a surprise, given the poor performance of state-run Petroleos de Mexicanos’ base oil business. “Regarding U.S. base oil imports, it is flowing well because the production from Pemex is still unpredictable,” he said.
Brazil also witnessed a gigantic year-over-year increase in U.S. base oil imports, from 3.4 million barrels to 4.3 million. In 2019, according to the Economist magazine, Brazil fully exited a recession and was South America’s largest economy, which helped boost auto sales. In 2019, about 4 million new vehicle were sold in Brazil, a 10.5 percent increase from 2018.
Sanctions against the region’s pariah, Venezuela – also hurt U.S. exports to that country, dropping them to 63,000 barrels last year from 96,000 in 2018. Small increases were reported in Bolivia (from 44,000 barrels in 2018 versus 53,000 in 2019); El Salvador (from 247,000 barrels to 267,000 barrels); and Honduras (from 121,000 barrels to 147,000 barrels).
