Just like the coronavirus pandemic has affected various countries to differing degrees, it has also impacted the various base oil segments in disparate ways, with API Group I grades tightening up and Group II also seeing surprisingly healthy buying interest in some regions.
This was one of the points discussed during the virtual ICIS Asian Base Oils and Lubricants conference, which took place earlier this week. Participants noted that despite predictions in recent years that Group I base oils would slowly be phased out due to high production costs, environmental concerns and declining demand, there has been an unusually high appetite for Group I grades, causing a global tightening of these cuts.
The increased consumption was partly attributed to higher demand for heavy-viscosity cuts and bright stock from segments such as heavy-duty transportation and marine oils. Given the pandemic and the need for the population to stay at home, many retailers have seen a surge in on-line sales, leading to a significant increase in the use of freight transportation, both on land and by sea.
Another factor that seemed to be impacting the market at the moment was the revival of manufacturing in many countries, and China in particular, after the lockdowns were lifted and employees were able to return to work. China has seen a significant economic recovery over the last several weeks as it was the first country to come out of the pandemic, several speakers agreed during the ICIS conference.
Given the worldwide rationalization of Group I production over the last few years, it seems that the market was bound to be out of balance when demand picked up, particularly in Asia. The extended shutdown of a Group I plant in Singapore was also thought to have played a part in the tightening conditions. Nevertheless, exports from Singapore to various Asian receivers increased significantly in July and August, compared to the first quarter.
As a result of the limited availability of Group I spot cargoes in Asia, some blenders secured Group II base oils whenever formulations allowed for substitutions, causing Group II supplies to tighten as well.
Additionally, traditional sources of Group II spot parcels such as Taiwan, South Korea and the United States saw a combination of planned and unplanned outages that pushed the market towards the tight side.
In Taiwan, a recent turnaround at Formosa Petrochemical‘s Group II plant in Mai-Liao in August limited the number of spot cargoes available for shipment to China and other Asian destinations.
In South Korea, the current turnaround at S-Oil‘s Group I and II plant was also thought to have resulted in reduced spot availability in the region. S-Oil started a planned maintenance program at its Group I, II and III complex in Onsan at the end of August that was expected to last until mid-September. The shutdown would only affect Group I and II production, and the producer has built inventories to cover contract obligations during the outage.
In the U.S., unforeseen outages caused by hurricanes that forced Group II producers to dial back or shut down operations have further tightened an already overburdened market segment. At least one producer, Excel Paralubes, remained off-line due to power supply issues. The rest of the producers have suspended spot shipments as they were focusing on meeting domestic contract requirements.
To top it all off, severe weather and typhoons in Asia have also caused port congestion and shipment delays in Taiwan and South Korea, according to sources.
As a result of all these elements, Group II prices have risen over the last few weeks, but given the downward movement of crude oil and feedstock prices, the upward momentum seems to have stalled slightly.
Seasonal patterns in countries such as China have also led to a demand reduction of various grades.
Despite an increase in manufacturing and economic activity in China over the last several weeks, base oil import volumes were heard to be declining due to increased production at local plants and a seasonal slowdown in downstream markets. A number of new plants also started production in the second quarter of the year, raising domestic availability of the light grades.
There was speculation of the potential of Chinese surplus cargoes moving to India and the Middle East, but existing taxes due to the preference by Chinese authorities to keep domestic supply within the country’s borders and other roadblocks seem to thwart these export transactions.
In India, demand for Group I and II base oils continues to be described as healthy, as the country emerged from lockdowns and other pandemic-related measures and resumed business, transportation and manufacturing activities. A turnaround at a domestic base oil plant, expected to start this week, may curtail availability of product at a time when demand increases, following the end of the monsoon season and ahead of several festivals in the fourth quarter.
Several U.S. base oil cargoes made their way to India since June, but the pace of shipments was expected to stall due to a tightening of supplies at U.S. base oil production units and a lack of spot offers.
Instead, there appears to be an increase in cargoes moving from Southeast Asia to India in the next few months, while Taiwanese parcels were also expected to reappear on the Indian scene.
Meanwhile, the Middle East seemed to continue as a steady source of supplies to India, China and other Asian destinations, although there may be a reduction in export shipments as Saudi Aramco Base Oil Co. – Luberef was expected to embark on a turnaround at its plant in Yanbu in early October. The shutdown could not be confirmed with the producer directly.
Contrary to information heard two weeks ago, Bahrain Petroleum Co.‘s Group III base oil plant in Bahrain is processing base oil at normal levels. There is a maintenance program scheduled at the Bapco refinery in October; however, it will take place in areas that do not impact the base oil unit, base oil production or deliveries, a source familiar with the company’s operations said.
Spot base oil prices in Asia were steady to firm. While there continued to be upward pressure on some grades due to tight conditions, an emerging decline in demand levels and falling crude oil prices were offsetting some of this market tension.
Ex-tank Singapore assessments for the Group I solvent neutral 150 grade were unchanged at $490/t-$530/t. The SN500 edged up by $5/t at the top of the range to $585/t-$630/t. Bright stock was adjusted up by $10/t to $685/t-$720/t, all ex-tank Singapore this week.
The Group II 150 neutral was steady at $500/t-$530/t, and the 500N was heard at $660/t-$690/t, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was heard at $420/t-$440/t, and the SN500 was holding at $500/t-$540/t. Bright stock was higher by $10/t at $600/t-640/t, FOB Asia.
Group II 150N was hovering at $460/t-$490/t FOB Asia, while the 500N and 600N cuts were assessed at $545/t-$585/t, FOB Asia.
In the Group III segment, the 4 centiStoke was assessed at $680-$720/t and the 6 cSt edged up by $10/t to $700/t-$740/t. The 8 cSt grade was stable at $670-690/t, FOB Asia for fully approved product.
Upstream, crude oil futures slipped on Thursday in Asia on concerns of a potential supply glut, even though prices had moved up the previous two sessions on fears of output disruptions in the U.S. Gulf caused by Hurricane Sally. OPEC was scheduled to meet on Thursday and members were anticipated to discuss compliance with current output levels.
On Thursday, Sept. 17, Brent November futures were trading at $42.10 per barrel on the London-based ICE Futures Europe exchange, from $40.68/bbl on Sept. 10.
Dubai front month crude oil (Platts) futures were reported at $42.08/bbl on the CME on Sept. 16.
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.