Prospects of a swift recovery for the battered base oil market appeared slim; instead, a majority of participants expected a gradual process stretched over the next few months as most economies reopened following coronavirus-related lockdowns.
A majority of base stock segments continued to be afflicted by a supply surplus against a backdrop of sluggish demand due to uncertainties in the downstream lubricants and additives sectors. Despite the fact that producers have trimmed operating rates at base oil facilities, inventories have grown and it will likely take some time before requirements make a dent.
In China, base oil plants that had either reduced run rates or shut down temporarily back in February due to the pandemic have ramped up production, or have restarted operations, with most of them achieving full rates in May. Producers were striving to take advantage of low crude oil prices and vastly improved margins.
While the restart of operations at factories throughout the region, together with more relaxed lockdown measures, was welcome news, base oil suppliers were well aware that demand levels from segments such as the automotive industry would remain depressed for some time. Some even ventured to predict that pre-pandemic demand levels would not be achieved for one or two years.
Additionally, while manufacturing plants may be resuming output, some may operate with reduced staff for a while to adhere to social distancing rules and avoid the spread of the virus.
Requirements for passenger car motor oils has plummeted as stay-at-home measures resulted in reduced vehicle usage, and market observers noted that demand had dropped anywhere between 35 to 70 percent over the period from March to May, compared to previous years.
Automotive sales have fallen substantially as well, with new vehicle sales in Japan falling by 28.6 percent in April from a year ago. The coronavirus pandemic continued to stifle sales, forcing major automakers including Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. to cut production, the Japan Times reported.
Automakers in India saw a steep sales decline in March as a slowdown in demand was exacerbated by shutdowns in production due to the coronavirus pandemic, according to Livemint.com. Maruti Suzuki’s sales were down 47 percent year on year that month, while Tata Motors said its passenger vehicle sales for March fell 68 percent, and that of trucks and buses 87 percent.
In China, auto sales grew in April for the first time in nearly two years, driven by increased demand for commercial vehicles. Sales increased 4.4 percent in April compared to the same month a year ago to just over 2 million vehicles, according to data published by the China Association of Automobile Manufacturers. Despite this growth, the market remains weak. Just 5.8 million vehicles were sold in the first four months of 2020, a 31 percent drop from a year earlier.
At the same time, buying interest for products exported from China has declined in Europe and the United States due to lockdown measures, economic contraction, and reduced purchasing power of a large percentage of the population. As a result, many Chinese manufacturing facilities were not running at full rates, including downstream lubricant plants.
Experts underscored that one of the main factors to impact the recovery was consumer confidence, which remained quite low as uncertainties about the future prevailed. Concerns about the possibility of a second wave of infections in many countries contributed to a general sense of wariness.
This uncertainty translated into a very moderate uptick in base oil demand during the week, as buyers were still working off existing inventories and appeared to be interested in securing only small cargoes.
The lockdown restrictions have been extended in India until early June, causing a further deterioration of base oil demand in a country that is typically a magnet for large quantities of base oils from South Korea, the United States, the Middle East and Southeast Asia.
Another element that acted as a damper in India was the weather – Cyclone Amphan pummeled vast Indian and Bangladeshi areas last week, and the monsoon season was just around the corner. Indian base oil demand tends to decrease as the heavy rains lead to logistical and transportation issues. The monsoon season lasts from June until September.
This means that suppliers will have to look for alternative takers for their products – with many targeting the reactivated markets in China. As a result, prices for imports to China have decreased significantly since the beginning of the year.
A regular exporter to China, Taiwanese producer Formosa Petrochemical, was heard to have reduced the Group II volumes shipped to that country for contract customers in May. It was not clear whether this was because of lower demand, or due to production cutbacks and reduced availability at the supplier’s plant, but June exports were anticipated to ramp up.
Asian spot prices remained under pressure due to oversupply, but the Group II heavy grades were somewhat of an exception, as tighter conditions in that segment drove offers slightly higher, particularly into China. Availability of heavy grades was more limited in the Chinese market as producers favor output of the lighter grades on the perception that they are of better quality, according to sources.
Ex-tank Singapore assessments for the Group I solvent neutral 150 grade were steady at $510/t-$550/t this week, while the SN500 was at $530/t-$570/t. Bright stock was heard at $650/t-$680/t, all ex-tank Singapore.
The Group II 150 neutral was holding at $520/t-$540/t and the 500N at $570/t-$610/t, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was heard at $440/t-$460/t, and the SN500 was holding at $450/t-$480/t. Bright stock was mentioned at $540/t-560/t, FOB Asia.
Group II 150N was unchanged at $420/t-$450/t FOB Asia, while the 500N and 600N cuts were hovering at $450/t-$470/t, FOB Asia.
In the Group III segment, the 4 centiStoke was holding at $670-$710/t and the 6cSt at $680/t-$720/t. The 8 cSt grade was assessed at $660-680/t, FOB Asia for fully approved product.
Upstream, crude oil futures slipped on Thursday on reports that Russia planned to start easing oil production cuts after the end of June, a surprise build in U.S. stocks, and growing tensions between the U.S. and China. On the positive side, oil demand appeared to be recovering in China and India.
Brent July futures were trading at $34.22 per barrel on the London-based ICE Futures Europe exchange on May 28, down from $36.58/bbl on May 21.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
Lubes’n’Greases shall not be liable for commercial decisions based on the contents of this report.
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