U.S. Base Oil Price Report

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The gradual lifting of Covid-19 lockdowns and phased reopening of businesses in several states have put the base oils market back in motion, although an increase in activity may not be discernible right away.

Just like the effects of the reopenings may not be immediately apparent on the number of new coronavirus cases because it takes two or three weeks for newly infected patients to become sick, so will the impact on base stock demand take some time before there is real improvement.

“There will surely be a lag for some metrics to be fully manifested. Meetings, gatherings, travel, will not be same for some time, if at all. This will be a historical benchmark mentioned for centuries to come,” a source commented.

Base oil suppliers have started to see a small increase in buying interest. “I think we might be turning a corner on demand,” a source noted, although the fresh orders were mostly for small volumes and requests were far from being at normal levels.

As more people start to venture away from their homes to go to work, run errands, or go to the doctor’s, driving was expected to increase, likely leading to an uptick in demand for gasoline and lubricants.

Car manufacturers and affiliated segments such as the tire industry were also getting ready to restart idled operations, although some may remained closed longer than anticipated – as is the case of Tesla – depending on reopening rules in each state. The New York Times reported that other car companies such as General Motors, Fiat Chrysler and Ford planned to resume operations on May 18, igniting hopes of an increase in demand for factory fill engine oils.

Travel industry experts also predicted that people would slowly start traveling again, but a majority will prefer to drive their personal cars for domestic travel rather than fly somewhere – which means that they are likely to consume more gasoline and lubricants. At the same time, jet fuel and aviation fluids consumption was expected to remain significantly down, as airlines have trimmed services and flight schedules.

Market participants did not expect for the base stocks and lubricants market to go back to pre-pandemic activity levels for a few months or longer. Demand destruction has been quite significant, with base oil levels falling approximately 50 percent on average in a majority of market segments since early March, and finished lubricant consumption down by about 35-70 percent.

Export opportunities have also all but vanished, as demand in Europe and Asia has also fallen by 50-90 percent since March compared with the same period a year ago. India is also a target of many U.S. shipment of base oils, but demand there has declined due to the lockdowns and because base oil storage is at capacity.

Despite the first signs of a very gradual market recovery, downward price pressure prevailed, as buyers were still hesitant about committing to base oil purchases and suppliers were doing their utmost to encourage orders by offering discounts and TVAs (temporary voluntary allowances or value adjustments).

Most suppliers were in possession of high inventories, and it may be some time before fresh orders make a dent. Participants were not expecting the current price trend to reverse quickly. “The proverbial needle is spinning, trying to find true north,” a source noted.

While paraffinic base oil supplies are exceeding current demand – keeping operating rates at reduced levels for the time being – the naphthenic side appeared more balanced. Some sources partly attributed this situation to the completion of a recent turnaround at Ergon’s refinery, which was postponed from its original restart date in March to April 20.

Next month, another naphthenic facility was expected to be taken off-line for maintenance. Calumet has scheduled a routine turnaround at its plant in Princeton, Louisiana, in the first half of June for approximately two weeks. The unit can produce 6,900 bbl/day naphthenic base oils.

Upstream, crude oil futures jumped on Tuesday, with West Texas Intermediate at a five-week high on expectations that falling production levels and a gradual demand recovery would ease a global glut of crude that has brought prices to their lowest levels in history.

Saudi Arabia’s promised to reduce its crude oil production by an additional, voluntary 1 million barrels per day beginning in June, simultaneously raising prices, according to news reports. OPEC+ reportedly agreed to continue production cuts beyond June, and the number of oil and gas rigs in the U.S. fell to their lowest level in decades.

Despite all of these output cuts, futures remained somewhat under pressure on fears of a virus resurgence in coming weeks, and the fact that production still outpaced demand, with lots of product still in floating storage, ready to be sold.

On Tuesday, May 12, June WTI futures settled at $25.78 per barrel on the CME/Nymex, and had closed $24.56/bbl on May 5.

Brent futures for July delivery closed at $29.98/bbl on the CME on May 12, from $30.97/bbl on May 5.

Light Louisiana Sweet crude wholesale spot prices settled at $28.52/bbl on May 11 and had closed at $26.27/bbl on May 4, according to the Energy Information Administration.

Coronavirus Note: As we are all affected in one way or another by the devastating coronavirus crisis, our most sincere thanks go to the brave and dedicated first responders, health care providers and other essential personnel who work tirelessly to protect us, secure our food supply, and keep us safe. We would also like to recognize those companies who have donated to various Covid-19 initiatives, and are manufacturing sanitizers, disinfectants and other supplies to fight the spread of the virus.

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.

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