Asia Base Oil Price Report

With crude oil prices retreating over the last couple of weeks, some of the pressure on base oil values has been lifted, but producers still feel their margins are squeezed on the back of higher production costs since earlier in the year.

Base stock producers lamented that despite the most recent drop in crude oil and feedstock prices, they have been unable to recoup margins as increases had been difficult to pass on to downstream products because of lackluster market conditions.

Suppliers had been able to gradually lift spot prices until May, but resistance to further increases had mounted and only small hikes have been pushed through over the last couple of months.

One of the reasons mentioned was that buyers had grown increasingly cautious about acquiring product as they expected prices to come down and did not want to keep pricey inventories, only to find out that prices had dropped later.

Price volatility in upstream segments, together with tensions in the global political and economic arenas were adding to the sense of uncertainty regarding price direction.

A fairly tight supply/demand scenario in Asia on the back of plant turnarounds was offering some support to higher price ideas, but the snug conditions were expected to ease as production comes back on stream.

This will coincide with the time of year when requirements tend to soften because of summer holidays in several countries, and a seasonal slowdown in the downstream lubricants sector.

In terms of production, it was heard that Formosa Petrochemical's turnaround at its 600,000 metric tons per year Group II plant in Mailiao, Taiwan, was proceeding as expected and the plant would likely be back on line in early September. The producer was heard to have sliced the volumes shipped to China under contract this month due to the turnaround, and has temporarily suspended spot shipments.

In China, China National Offshore Oil Corp. was heard to have idled its plant in Huizou in mid-July. The 300,000 t/y unit was taken off-line due to technical issues, and was anticipated to be restarted before the end of the month.

Also in China, PetroChina was reported to have planned a turnaround at its plant in Karamay starting in early August. The plant can produce 700,000 t/y of Group I and 600,000 t/y of naphthenic oils, and the turnaround was believed to affect only the paraffinic lines and was expected to last approximately 45 days.

It was also heard that Sinopec had restarted its base oil plant in Nanjing after a short shutdown that started in mid-June. The unit can produce 200,000 t/y of Group II base oils and resumed production earlier this month.

In related production news, there continued to be rumblings that the Shell/Qatar Petroleum gas-to-liquids Pearl refinery in Ras Laffan, Qatar, was not running at 100 percent capacity due to mechanical problems. The 300,000 t/y Group II and slightly over 1 million t/y Group III base oil plant had been unexpectedly shut down in February 2017 and remained off-line until April 2017, with full production anticipated to be achieved by July of the same year. However, it was heard that lingering issues prevented the plant from reaching full capacity, although this could not be confirmed with the producer directly.

In terms of base oil prices in Asia, market uncertainties placed a damper on spot transactions and trading was generally thin, with values reported as flat this week.

Spot prices on an ex-tank Singapore basis were unchanged, with Group I SN150 heard at $780/t-$800/t, and the SN500 at $890/t-$910/t. Bright stock was steady at $960/t-$980/t, all ex-tank Singapore.

Group II 150 neutral was holding at $820/t-$850/t, and the 500N cut at $910/t-$930/t ex-tank Singapore.

On an FOB Asia basis, Group I SN150 was gauged at $710/t-$730/t, while the SN500 was heard at $840/t-$860/t. Bright stock was unchanged at $870/t-$890/t FOB Asia.

Group II 150N was hovering at $760/t-$780/t, while the 500N/600N was holding at $830/t-$860/t, all FOB Asia.

In the Group III segment, the 4 centiStoke and 6 cSt grades were assessed at $880-$900/t and $860/t-$880/t, respectively. The 8 cSt was assessed at $770/t-$790/t, FOB Asia.

Upstream, crude oil futures slipped on Thursday, after inching up slightly early in the trading session on comments by Saudi Arabia that the country would reduce oil output in August. Numbers retreated as concerns about a potential global oversupply prevailed, since Saudi Arabia, Russia and other major producers were expected to increase output, and data also showed an unexpected rise in U.S. stockpiles.

On Thursday, July 19, Brent September futures were trading at $72.62 per barrel on the London-based ICE Futures Europe exchange, from $74.48 per barrel on July 12.

Significant market attention also focused on the United States-China trade war that started with the implementation of a round of tariffs on Chinese imports of steel and aluminum, which the Chinese retaliated to by raising tariff duties on 128 products imported from the United States, effective April 2.

The Trump Administration further announced that it would impose trade and investment sanctions against China as a result of the U.S. Trade Representatives Section 301 investigation into Chinese intellectual property and technology transfer policies. That investigation found at least U.S. $50 billion per year in harm caused to the U.S. economy, and led to a plan to implement tariffs against Chinese imports of corresponding value, a report by Covington Global Policy Group said.

In response to this announcement, on April 4, China announced plans for 25 percent tariffs on $50 billion worth of U.S. goods, including lubricants and lubricant additives not containing petroleum or extracted from bituminous minerals. Chinas tariffs eventually went into effect July 6, the same date that the corresponding U.S. tariffs were implemented.

Following this move, the USTR said on July 10 that it was starting a process to levy 10 percent of tariffs on $200 billion worth of additional Chinese products. China promised to retaliate to the latest U.S. tariffs with similar measures.

The new tariffs will result in extra time required to prepare shipments and in additional production costs, which will have to be fully or partly absorbed by the manufacturers, or passed down to the consumer through higher product prices, or temporary surcharges, industry experts warned. The full impact of the tariff implementation was still unknown.

Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.

LubesnGreasesshall not be liable for commercial decisions based on the contents of this report.