Market players returned to business this week to find tumultuous conditions in the crude oil and feedstocks segment as tensions between the United States and Iran have flared up, following the death of a top Iranian military leader.
Crude oil futures spiked following news that the United States had killed Iranian general Qasem Soleimani in the Iraqi capital of Baghdad on Jan. 3. In retaliation, the Iranian clerical leadership launched ground-to-ground missiles at a U.S. military base in Iraq.
Brent futures jumped by more than four percent after the missile attacks, but retreated as President Trump on Wednesday said that while he would be imposing new sanctions on Iran, he was "ready to embrace peace."
On Thursday, Jan. 9, Brent March futures were trading at $65.80 per barrel on the London-based ICE Futures Europe exchange, compared to $66.28/bbl on Jan. 2.
In other industry-related news, a few major ship owners operating in the Persian Gulf were heard to be curtailing operations there, according to Reid I'Anson, global energy economist at Kpler, a commodity intelligence company. Following the killing of the Iranian general and the missile attacks ordered by Iran at U.S. military bases, several oil tankers operated by major players have diverted away from the Persian Gulf, or delayed loading by several days.
It was not clear whether this situation would be affecting Group II/III base oil shipments from the Middle East, but freight rates have already started to move up due to steeper insurance costs, according to sources. These hikes come on the back of higher costs generated by the new IMO 2020 regulations that require the use of low-sulfur marine fuels as of Jan. 1.
Aside from the turmoil on the international stage, local uncertainties were also expected to have an impact on base oil demand in the next few weeks. In China, base oil requirements declined in 2019 versus the previous year due to a slowdown in the economic growth rate of the country and more specifically, in the automotive segment, and this situation was expected to continue in 2020.
China was also anticipated to import less product given the start-up of domestic Group II base oil plants. These plants are producing low-viscosity grades to fulfill requirements of higher performance base oils for lubricants that meet automakers' stricter fuel economy and lower emission specifications.
Base oils and lubricants demand in China and Asia in general could also improve if a deal between Beijing and Washington is achieved during the first part of the year, putting an end to an over 18-month long trade dispute. Chinese trade delegations were scheduled to travel to Washington next week to sign the U.S.-China Phase 1 trade deal, according to media reports. President Trump had announced on Dec. 31 that the first phase deal would be finalized on Jan. 15, and that he would later travel to Beijing to begin talks on the next phase.
The recent climb in crude oil and raw material prices was counterbalancing some of the downward price pressure that base oil suppliers have been dealing with due to regional supply length against tepid demand.
Several Asian producers - including the Taiwanese Group II producer, a couple of South Korean producers, and a large refiner in Singapore - had trimmed production rates to avoid supply length, and a few of them were expected to keep these cutbacks until demand improved. An industry expert noted that global base stock production rates were hovering between 75 and 85 percent given the current supply/demand imbalance.
Taiwanese producer Formosa Petrochemical was heard to be increasing its production rates this month on expectations of improved conditions. The producer was heard to have scheduled a routine turnaround at its Group II plant in Mailiao in June.
Formosa was also understood to be maintaining the domestic list prices for its Group II 70 neutral, 150N and 500N grades for January shipment unchanged from the previous month.
Spot prices in Asia were generally assessed as steady from the previous week as business was gradually picking up the pace, following the absence of a good deal of players during the holidays, but not a large number of transactions were reported.
Ex-tank Singapore Group I prices for the solvent neutral 150 grade was heard at $680/t-$700/t, and the SN500 was at $730/t-$750/t. Bright stock was assessed at $820/t-$840/t, all ex-tank Singapore.
The Group II 150 neutral and 500N were holding at $720/t-$740/t and $730/t-$750/t, respectively, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was stable at $540/t-$570/t, and the SN500 grade was heard at $550/t-$560/t. Bright stock was hovering at around $700/t-$720/t, FOB Asia.
Group II 150N was steady at $570/t-$590/t FOB Asia, while the 500N and 600N cuts were unchanged at $590/t-$610/t, FOB Asia.
In the Group III segment, the 4 centiStoke and 6 cSt were heard at $770-$800/t and $780/t-$825/t, respectively. The 8 cSt grade was gauged at $720-740/t, FOB Asia for fully approved product.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
LubesnGreasesshall not be liable for commercial decisions based on the contents of this report.
Historic and current base oil pricing data are available for purchase inExcel format.