Strained supply levels against robust demand – together with rising crude oil and feedstock costs – have catapulted spot base oil prices to new heights, a phenomenon that is rather unusual during the last few weeks of the year.
Instead of trying to unload inventories at reduced prices to whip up buying interest, some producers have struggled to cover contractual obligations and also participate in the spot arena, where prices have been on a steady rise.
The current product tightness was partly attributed to ongoing trimmed operating rates at several refineries in response to a sharp drop in fuels demand, particularly jet kerosene, due to the global coronavirus pandemic and travel restrictions. With air travel still dramatically below those levels seen at this time last year, refineries have had to adapt to the changing refining requirements.
“We have updated our global air passenger traffic forecasts and now expect traffic to fall by as much as 60%-70% in 2020 versus 2019,” an S&P Global report said. “This is weaker than the 50%-55% drop we forecast at the end of May. We now expect 2021 air passenger traffic to decline 30%-40% compared with the 2019 base, and foresee a more gradual recovery to pre-COVID-19 levels by 2024,” the report added.
The huge drop in fuel consumption has affected base oil production, although it was heard that a number of base oil plants in Asia had hiked run rates over the last couple of months to catch up with a demand revival. At least two South Korean base oil plants were heard to be now running at close to full rates. Despite this development, South Korean producers were said to have little spot material available as they were prioritizing contractual obligations.
Observers have also pointed out that the pandemic had resulted in an increased dependence on intra-regional base oil trade, with shipments from countries that typically do not supply certain countries in the same region starting to do so. Such was the case of Indonesian base oil shipments moving to Singapore, for example, or Thai cargoes moving to China. Taiwan, which traditionally exports most of its spot availability to China, has also shipped more volumes to other destinations such as India, but this may change as Chinese demand for imports experiences a revival.
The Taiwanese producer was heard to have raised its API Group II domestic list prices for December in response to the tight market conditions and steeper feedstock prices.
India’s appetite for base oils has ballooned since June, but market participants questioned whether this trend would be sustained. The ongoing pandemic and economic uncertainties could result in a slowdown in industrial, transportation and automotive segments, and drag down demand for lubricants, although the number of reported cases has fallen in India and a coronavirus vaccine branded “Covaxin” was expected to be available in India in the first quarter of the new year.
India continued to secure base oils from different nations within Asia, including South Korea, Taiwan, Thailand, but has also booked imports from the United States, the Middle East and Europe.
However, cargoes from the U.S. have diminished since September because of a tightening of supplies at that origin. It appears that base oils for export have started to flow again from a couple of U.S. Group II plants, but most availabilities have been earmarked for Latin America, rather than for long-haul markets such as India.
Middle East cargoes were still moving to India, but quantities were said to have fallen slightly as suppliers were also shipping large quantities to markets such as the U.S.
While Indian consumers had been able to purchase base oils fairly easily, once they had upped their bids, they were now dealing with competition from Chinese buyers.
Chinese consumers had so far stayed largely away from the export spot market because domestic supplies have been sufficient to cover demand. However, there was a shortage of bright stock and the heavy grades in China, and Chinese participants were forced to make an appearance on the international stage in order to procure these cuts.
Domestic producers in India were also heard to have raised their pricing, contributing to the ongoing price uptrend. Similarly, Chinese producers have lifted domestic prices, despite the fact that prices are typically reduced in December. Given the keen buying interest this time around, prices seemed to receive support in the marketplace.
Steeper crude oil and feedstock prices were also heard to be placing additional pressure on values, but movements in crude pricing do not typically translate into higher base oil prices overnight. Still, they were one more element buoying price expectations.
Crude oil futures had been on an upward trek until Wednesday, when they slipped on reports of a massive build in U.S. crude oil inventories–almost reaching the largest crude build ever, recorded earlier this year in April, OilPrice.com reported. Oil prices reversed their recent rally as worries about the steady rise in global coronavirus infections overshadowed positive news about the vaccine earlier in the week.
On Thursday, Dec. 10, Brent February futures were trading at $49.08 per barrel, from $48.48/bbl on Dec. 3 on the London-based ICE Futures Europe exchange.
Dubai front month crude oil (Platts) financial futures settled at $48.04/bbl on the CME on Dec. 9, from $47.46/bbl on Dec. 2.
Spot base oil prices in Asia underwent upward adjustments this week, to reflect the strong fundamentals and published prices widely regarded as benchmarks for the region.
Additionally, a producer in Singapore was heard to have started to implement an increase on its Group I and II base oils as of this week.
Ex-tank Singapore prices were adjusted up this week on higher price discussions. The Group I solvent neutral 150 grade was assessed up by $20/t at $645/t-$685/t. The SN500 jumped by $40/t to $810/t-$850/t and bright stock was also up by $40/t at $890/t-$930/t, all ex-tank Singapore this week.
The Group II 150 neutral was adjusted up by $40/t to $690/t-$730/t, and the 500N was adjusted up by $30/t to $820/t-$850/t, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was assessed up by $20/t at $570/t-$610/t, and the SN500 was revised up by $30/t to $730/t-$770/t. Bright stock was higher by $20/t at $810/t-850/t, FOB Asia.
Group II 150N was assessed up by $20/t to $600/t-$640/t FOB Asia, while the 500N and 600N cuts also edged up by $20/t to $710/t-$750/t, FOB Asia.
In the Group III segment, the 4 centiStoke was revised up by $20/t to $810-$850/t and the 6 cSt was also up by $20/t at $820/t-$860/t. The 8 cSt grade was assessed higher by $10/t at $750-790/t, FOB Asia for fully approved product.
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.
Historic and current base oil pricing data are available for purchase in Excel format.