The Covid-19 pandemic has brought trading in Asia to a standstill, as more and more countries implement strict social distancing and lockdowns, business closures and remote work, with the impact primarily seen on manufacturing, commerce, tourism, transportation and in supply chain disruptions.
One of the largest base oil and lubricants markets in the world, India, was expected to be significantly affected by the three-week lockdown that Prime Minister Narendra Modi implemented to contain the spread of the virus this week. The outbreak has already affected India’s manufacturing and export sectors, mainly medicines, electronics, textiles and chemicals.
With similar business and school closures imposed in many other countries of the world, demand for fuels and lubricants was expected to deteriorate quite rapidly.
While some of the impact of the pandemic has already become obvious as the disease continues to claim thousands of lives, it will be quite some time before the full impact can be assessed, market observers said.
For the time being, it appeared that a majority of base oil participants were reluctant to conclude business, as price levels and projections were unclear and plans changed on a daily basis.
Shipping arrangements have also been a problem because ship operators have reduced services on certain lanes, and ports have altered their schedules due to a dearth of employees.
There is the added pressure of special contract clauses to cover for possible cancellations caused by the virus. “Customers are leery of buying cargo lots because virus clauses that ship owners insist on greatly increase the risk of chartering,” a source explained.
One of the more immediate outcomes of the pandemic has been the sharp fall of crude oil prices on pessimistic economic prospects and an immense dent in global demand.
The oil slump was further exacerbated by the ongoing price war between Russia and Saudi Arabia as the two oil producers sought to retain or gain market share.
Oil futures fell in early trading on Thursday, erasing some of the gains of previous sessions, as worldwide restrictions to contain the coronavirus damaged demand and offset optimistic expectations that a U.S. $2 trillion emergency stimulus would promote economic activity.
On Thursday, March 26, Brent May futures were trading at $27.04 per barrel on the London-based ICE Futures Europe exchange, up from $26.04/bbl on March 19, but significantly down from levels near $50/bbl during the first week of March.
In Japan, the base oil segment had already seen a slowdown due to the increase in the consumption tax implemented in the last part of 2019, which had led to reduced automotive sales and lubricant requirements, and the industry was experiencing even more severe symptoms on the heels of the virus outbreak.
Even though the drop in crude oil prices was likely to affect refineries and petrochemical segments in coming months, the Japanese domestic pricing of base oils, which is largely determined via a formula based on a “cocktail” of prices that includes the CFR value of crude oil, will be going up for the second quarter of 2020.
Sources indicated that the largest base oil producer, JXTG Nippon Oil and Energy, will be increasing the Q2 price of the 150N grade by Japanese Yen 5.1 per liter to 97.96 per liter.
Meanwhile, in China, there have been reports that activity had started to pick up, following three months of highly reduced business due to the virus outbreak.
Although idled base oil plants and manufacturing facilities were heard to have been restarted, or were ramping up production, sources said there were no obvious signs that the situation had started to improve. “We’ve all seen the reports that China is waking up, but I’ve not seen any evidence of deals being done,” a market source commented.
Regular suppliers to China have been scrambling to look for alternative takers of cargoes, as the country has dramatically cut back imports.
It was heard that suppliers and traders had made frenzied calls to buyers in several regions to place these cargoes, but were largely unsuccessful. Eventually, a South Korean producer was reported to have sold an API Group II cargo to a Middle East-based trader to go into inventory for possible ex-tank sales in the United Arab Emirates.
Despite the collapse of feedstock costs and the significant downward pressure that base oil prices were exposed to, the spot ranges portrayed below have been notionally retained at unchanged levels due to a dearth of reported transactions and firm discussions.
“The lack of activity leaves it very much up in the air as to what prices will do once the base oil market regains a pulse,” a market participant acknowledged.
Base oil prices in other regions were showing the impact of the crude oil plunge and of the outbreak on the different economic segments, with base oil posted prices in the United States plummeting by as much as U.S. $180 per metric ton over the week.
Ex-tank Singapore Group I prices for the solvent neutral 150 grade was unchanged at $640/t-$660/t, and the SN500 at $690/t-$710/t. Bright stock was assessed at $810/t-$830/t, all ex-tank Singapore.
The Group II 150 neutral and 500N were hovering at $700/t-$720/t and $710/t-$730/t, respectively, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was holding at $530/t-$550/t, and the SN500 grade was also hovering around $530/t-$550/t. Bright stock was steady at $690/t-$710/t, FOB Asia.
Group II 150N was unchanged at $550/t-$570/t FOB Asia, while the 500N and 600N cuts were at $580/t-$600/t, FOB Asia.
In the Group III segment, the 4 centiStoke was hovering at $750-$780/t and the 6cSt was assessed at $760/t-$790/t. The 8 cSt grade was unchanged at $720-740/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.