Concerns about supply shortages seemed to be heightened by the unexpected outage at Ergon’s paraffinic base oil plant in West Virginia last week, with suppliers receiving calls from buyers desperately trying to locate API Group I and Group II cargoes. However, a majority of producers reported sold-out positions and additional barrels of base oils became increasingly difficult to find.
Ergon declared force majeure on base oils, process oils and other products as a result of a significant fire at the company’s Newell, West Virginia, refinery on May 29. The base oil plant at the refinery has capacity to produce 1,900 barrels per day of Group I and 2,900 b/d of Group II base oils, according to the Lubes’n’Greases Guide to Global Base Oil Refining.
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“West Virginia continues to evaluate the extent of the damage and is in the process of planning for how and when the plant will be restarted,” the company said in a statement. Ergon had previously also said that product inventories, which were already at critically low levels due to a recent planned turnaround and subsequent delayed startup, were depleted.
The news about the shutdown prompted a number of buyers to look for product from different suppliers. “There was a surge in requests for 5-30 railcars of almost any oil,” a source noted, while others acknowledged that it had been almost impossible to find extra volumes from Group I and II suppliers, as most inventories were already low before the outage. Suppliers were focusing on fulfilling contractual obligations and were left with almost no product for spot transactions.
Bright stock was particularly thin on the ground as at least two bright stock producers have recently completed extended turnarounds and were unable to offer added volumes.
A major Group II producer was heard to be making every effort to meet its customers’ product needs, but shipments were suffering delays. “They simply cannot keep up with demand. An order placed for a railcar today will not ship until July,” a source observed.
Exports to Mexico saw an uptick during the week, as a number of light-viscosity base oils were shipped there for fuel blending. These grades were slightly more plentiful in the U.S. than the heavy-vis cuts.
Downstream, blenders were feeling the base oils and additives supply squeeze and many have had to cut down operating rates at manufacturing plants, or idle production temporarily until they were able to receive fresh shipments of raw materials.
One major point of concern was that neither suppliers nor consumers have been able to build inventories ahead of the hurricane season in the Atlantic basin, which runs from June 1 to Nov. 30. Typically, base oil market participants head into the season with extra availability in case of potential output disruptions caused by extreme weather. “There will be no build for hurricane safety stock by anyone,” a source remarked, while others commented that if base oil and lubricant plants were impacted by storms like Hurricane Harvey in 2017, then the whole industry would be in dire straits, as inventories were low in other regions as well.
Group III base stocks were also said to be extremely tight, as demand has been healthy and recent turnarounds in South Korea, Europe and the Middle East have resulted in reduced availability for export to the U.S. Many buyers who were unable to secure Group II cuts resorted to purchasing Group III grades for certain applications, exacerbating the tight supply and demand balance.
The strained supply conditions, together with steady demand and firm crude oil and feedstock prices drove paraffinic and naphthenic producers to implement price increases between May 26 and June 11.
A majority of paraffinic producers communicated 20, 30 and 40 cents per gallon posted price markups, depending on the grade and the producer. Suppliers who do not publish posted prices also adjusted prices up by 30 cents for most grades, according to sources.
This week, San Joaquin Refining announced that “due to drastically changing market conditions including increased demand and supply shortages of naphthenic base oils,” the company would be raising prices on all products by 30 cents/gal. The increase will take effect on June 11, and is based on ship date, not order date, the company explained.
The supply and demand ratio on the naphthenic side of the business was also severely constrained and producers were not always able to meet flourishing requirements from export markets such as Latin America and Europe. This segment of the market has also seen its share of supply woes related to turnarounds and the winter storm in February, which had struck a number of paraffinic plants as well.
All of the recent base oil price increases, together with rising transportation, packaging and other production costs prompted a number of finished lubricant manufacturers to announce increases between 5% and up to 17%, with implementation dates set for late June into July.
According to reports, additive suppliers were also seeking increases. A major supplier was heard to be increasing additive prices by up to 8%, effective June 24.
Upstream, crude oil futures retreated in early trading on Tuesday on profit taking and a stronger U.S. dollar. However, analysts remained optimistic that demand would continue on its path to recovery, despite uncertainties in India and other countries due to the pandemic, with West Texas Intermediate futures trading above $70/bbl for a second day in a row.
On Tuesday, June 8, July WTI futures settled at $70.05 per barrel on the CME/Nymex, and had closed at $67.72/bbl on June 1.
Brent futures for August delivery settled at $72.22/bbl on the CME on June 8, from $70.25/bbl on June 1.
Light Louisiana Sweet crude wholesale spot prices were hovering at $71.21/bbl on June 7 and had closed at $68.46/bbl on May 28, according to the Energy Information Administration. There was no trading on Monday, May 31 due to the Memorial Day holiday.
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.