Base oil demand has softened in Asia due to seasonal patterns, upcoming religious festivals, and the traditional efforts by both buyers and sellers to finish the year with low inventories to avoid tax repercussions on unused stocks. This trend exerted downward pressure on prices at a time when supply has also lengthened, resulting in producers acquiescing to lower prices for a number of grades.
Another factor that was impacting base oil consumption was the disruption of manufacturing activities in many countries, due to supply chain issues and a lack of raw materials such as additives, along with components such as microprocessors or microchips.
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Car manufacturing was one of the segments that felt the effect of the supply chain disruptions the most, with some factories being forced to shut down or reduce operating rates. This impacted the finished lubricant sector as some original equipment manufacturers had to cut or delay orders as factory-fill activity was reduced. The slowdown resulted in lower consumption of synthetic oils, which in turn affected demand for API Group III base oils. Manufacturers struggled with transportation and raw material issues, plus rising production costs, while consumers were dealing with a shortage of new cars and skyrocketing prices.
“Some car sellers, for instance, are warning potential buyers to be flexible, because getting the exact color and make they want is going to take a while: Vehicle shortages are expected to stretch into next year,” noted Rob Walker in a Fortune magazine online article on Oct. 23.
The industrial segment was also affected by the same supply and logistics issues and consumption of industrial lubricants was down, according to sources.
In China and India, energy shortages were exacerbating the supply chain issues. Chinese port congestion continued, although some of the vessels have been able to load and discharge over the last few days, but many base oil suppliers have avoided concluding shipments to China because of the logistical bottlenecks. Chinese demand for diesel has also increased as other energy sources have been in short supply, and this has led to higher diesel prices. Some refiners were favoring diesel production over other refined products such as base oils.
At the same time, the celebration of the religious festival of Diwali will be starting on Nov. 1 in India, Malaysia, Pakistan and other countries. This means that a large part of the population will travel to their home town to see family, and demand for lubricants saw an uptick given an increase in oil changes ahead of the holiday.
Spot prices for Group I and Group II base oils had gradually moved down over the last three months, but Group III values had remained fairly steady. However, softer demand and an increase in regional supplies of these grades have caused prices to decline. “In pre-pandemic times, we saw oversupply for all grades. [Then] we went through this period where everything was short, now we are going back to oversupply,” a source explained, noting that this was particularly evident in the Group III segment.
The Group III sector is not expected to see a reduction in supply levels until Q2 2022, when the Hyundai-Shell plant in Daesan, South Korea, was expected to undergo a turnaround, starting in early April for approximately one month. There was no producer confirmation about the shutdown schedule.
With Group I production rates having improved since the beginning of the year, and Japanese plants having completed maintenance shutdowns, supply of Group I base oils has increased. This situation placed pressure on price indications, with bright stock undergoing the most dramatic adjustments. The heavy grades were also more exposed to the softening effects because demand tends to slacken during the cold winter months, when blenders switch to lighter viscosities in their formulations.
Nevertheless, a majority of Southeast Asian Group I producers reported close to sold out conditions in October and similarly strong buying interest so far for November cargoes, although the volumes that have been exported slumped so far in the second half of the year compared to the first half. Most of the material was moving within Southeast Asia. A couple of parcels were heard in discussions for shipment from Rayong, Thailand, to Singapore in November. A number of Japanese Group I cargoes were also anticipated to move to China next month.
The Group II segment saw brisk buying activity as well, but demand has weakened compared to the first part of the year, and supply was also more plentiful, which allowed buyers to feel less pressure to jump at the first offer and gave them the confidence to negotiate pricing conditions.
Group II availability was expected to improve since Taiwanese producer Formosa Petrochemical resumed production in late September, following an extended turnaround. The producer was heard to be rebuilding inventories and has been able to ship cargoes to China, India and even the United States.
Chinese buyers have reentered the market and have secured a few imports to meet steady demand. About 5,000 metric tons were expected to move from Malacca, Malaysia, to China in mid November. A 6,500 metric ton parcel was on the table from Ruwais, United Arab Emirates, to Zhenjiang, also for mid November lifting. A couple of South Korean cargoes were discussed for shipment to China next month, including a 2,000 metric ton parcel from Ulsan to Tianjin.
South Korean suppliers have been actively shipping product within Asia and to other regions as well. A large parcel of up to 20,000 metric tons was expected to be lifted from Daesan to West Coast India in mid November. A 16,000-18,000 metric ton cargo was discussed for shipment from Onsan to Mumbai, India, in early November. A small parcel was expected to move from Ulsan to Port Klang, Malaysia, early next month as well.
Base oil prices were mixed in Asia this week, as some grades edged up, some were steady and others declined because each group was impacted by different factors as described above. The spot ranges portrayed below have been revised to reflect bids and offers, deals and published prices widely regarded as benchmarks for the region.
Ex-tank Singapore prices were steady to lower this week. The Group I solvent neutral 150 grade was unchanged at $830/t-$860/t, and the SN500 was lower by $10/t at $1,050/t-$1,100/t. Bright stock edged down by $10/t to $1,340/t-$1,380/t, all ex-tank Singapore.
Prices for the Group II 150 neutral hovered at $870/t-$910/t, while the 500N was lower by $10/t at $1,290/t-$1,330/t, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was steady at $700/t-$740/t, but the SN500 slipped by $10/t to $890/t-$930/t. Bright stock was assessed down by $10/t at $1,200/t-1,240/t, FOB Asia.
Group II 150N was holding at $730/t-$770/t FOB Asia, and the 500N and 600N cuts were also steady at $1,090/t-$1,130/t, FOB Asia.
In the Group III segment, prices were lower, with lengthening supply exerting downward pressure. The 4 centiStoke was down by $20/t at $1,410-$1,450/t and the 6 cSt also down by $20/t at $1,420/t-$1,460/t. The 8 cSt grade was also assessed lower by $20/t at $1,300-1,340/t, FOB Asia, all for fully approved product.
Upstream, crude oil prices had been on an upward trek over the last three weeks, but receded in mid-morning trade in Asia on Oct. 28 on news that Iran and Western nations were closer to agreeing on having talks about the Iranian nuclear program before the end of November, feeding expectations that Iranian oil may become available again in the near future. A build in U.S. crude inventories also weighed on prices.
On Oct. 28, Brent December futures were trading at $84.03 per barrel on the London-based ICE Futures Europe exchange, from $84.78/bbl on Oct. 21.
Dubai front month crude oil (Platts) financial futures for November settled at $81.44/bbl on the CME on Oct. 27, from $82.76/bbl on Oct. 20 (CME note: Settlement prices on instruments without open interest or volume are provided for web users only and are not based on market activity.)
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.