U.S. Base Oil Price Report

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With crude oil prices rising to eight-month highs over the week, base oil supply remaining very tight and a number of producers having announced price increases in November, the big question among market participants was whether there would be additional price adjustments this month.

Potential price movements “seem to be a hot topic this past week,” a source noted, while another emphasized that there were a lot of conjectures, but no firm communication from producers, other than from those who had already announced increases.

Phillips 66, SK Americas and Petro-Canada communicated price increases of 20, 25 and 30 cents per gallon for their API Group II+ and Group III base oils, implemented between Nov. 18 and 23. The increases seemed to be confined to the Group II+ and Group III segments.

Participants said that climbing crude oil prices placed additional pressure on production costs, and that the OPEC+ meeting taking place this week would likely determine the trajectory of oil prices in the coming months. If oil producers decided to maintain production curbs on concerns about a potential slump in demand caused by a flare-up of the coronavirus, then prices could be propped up, or even increase in the near future, but an increase in crude output would lead to a drop in prices, analysts said.

One of the main factors influencing base oil values, though, remained the current tight supply and demand ratio. This was the result of production outages on the United States Gulf Coast starting back in late August, along with ongoing reduced operating rates and healthy uptake, both from the domestic and export sectors.

Consumption of base oils had suffered when the first pandemic-related lockdowns were implemented, but a reopening of businesses and an increase in the population’s mobility had led to heightened demand. However, a second surge in the number of infections in the U.S. and Europe was expected to bring about another decrease in base oil and lubricant consumption levels.

A number of blenders said that demand from downstream applications had softened and was “pretty depressed,” although some geographical areas were doing better than others, with the Midwest and Northeast of the U.S. mentioned as maintaining healthy levels of activity.

Base oil suppliers were somewhat surprised that December demand was still quite strong, as requirements typically decline during the last month of the year. “I think we will have a good December,” a supplier source acknowledged, while another seller agreed that orders had been steady and it had not been able to meet any spot inquiries due to a lack of extra availability.

Spot base oil prices have risen steadily over the last three months and continued to be exposed to upward pressure due to the lack of cargoes. However, with the return to production at one facility and others increasing operating rates, supply has started to improve in the U.S.

There was still buying appetite from India, and a couple of U.S. cargoes have been fixed to move to that country this month, but prices were being impacted by competition with South Korean and Middle Eastern suppliers, particularly for light grades, and this was hampering export transactions, aside from the lack of spot supply.

Demand for U.S. Group I exports moving into Mexico and Group II barrels into Brazil was also robust. In years past, Mexican buyers would be looking for attractive prices as producers generally like to reduce inventories before Dec. 31, but this was not the case this year, as inventories are already low.

Buyers seemed to be more willing to secure product at higher values, particularly as Group I grades were extremely tight and Group II barrels were also largely unavailable. Whatever material becomes available for spot business is quickly soaked up for export, especially Group I going to Mexico. ”They are not receiving any year-end Black Friday specials from anyone,” a source commented. Mexican consumers were heard to be booking U.S. Group I cargoes, but “nowhere near the amount they need,” sources admitted.

Export price indications for light grades have climbed as well. Buyers were hoping to acquire Group I and Group II product at around $1.80-$1.90/gal FOB, but nothing could be obtained below $2.00/gal FOB now, according to sources. Bright stock has also moved up to well above $3.00/gal FOB, although some material of Middle East origin was hovering at slightly lower levels.

Group I and II supplies were anticipated to remain snug for the foreseeable future as a major U.S. producer continues to ship product to its operations in Singapore due to the ongoing shutdown of its Group I facility in Pulau Ayer Chawan, Singapore. The plant was expected to be restarted in 2021, but this was not confirmed by the producer as it does not comment on its operations.

Additionally, Calumet was heard to be building inventories ahead of a 30-day turnaround at its Group I and II base oils plant in Shreveport, Louisiana, in February. The producer hopes to continue to meet contractual obligations during the shutdown, but is currently entertaining little spot business.

Another large producer on the U.S. Gulf was also heard to have trimmed its operating rates, but a reason for this and other details were not forthcoming and there was no comment from the supplier directly.

On the naphthenics front, Cross Oil communicated that would be increasing all prices on those accounts that the company has not already adjusted as of Dec. 1. The company increased its light grades by 25 cents/gal and its heavy cuts by 20 cents/gal on escalating costs of crude and crude handling and of handling refinery by-products in a very weak distillate market.

Cross Oil was anticipated to take its naphthenic base oils plant in Smackover, Arkansas, off-line for a 21-day turnaround in early March.

Other naphthenic producers were heard to be evaluating market conditions and were likely to reassess pricing in December. Supply was described as balanced-to-tight against demand, with most producers reporting little to no product for spot shipments.

Export activity has also stayed above expected levels for November and December, while the heavier grades have seen a renaissance as some blenders have been using the naphthenic oils to replace the difficult-to-locate paraffinic bright stock in applications where this is possible.

Crude oil futures climbed on Monday, despite the steady increase in coronavirus cases in the U.S. as inventories have declined at a steady pace since the summer, but numbers dipped on Tuesday as the OPEC+ decision on production cuts has been postponed until Thursday due to a disagreement among members on a possible extension of the curbs.

Expectations that the start of vaccination could result in increased fuel consumption next year, together with a likely cut in crude output to be decided by the OPEC+ this week, had boosted prices, but three members, including Russia, are eager to increase output starting in January, OilPrice.com reported.

On Tuesday, Dec. 1, January 2021 WTI futures settled at $44.55 per barrel on the CME/Nymex and had closed at $44.91/bbl for December futures on Nov. 24.

Brent futures for February delivery settled at $47.42/bbl on the CME on Dec. 1, from $47.86/bbl for January futures on Nov. 24.

Light Louisiana Sweet crude wholesale spot prices closed at $46.50/bbl on Nov. 30 and had closed at $44.31/bbl on Nov. 23, according to the Energy Information Administration.

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.

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