Tightening supply and steeper feedstock prices have resulted in stable to firm spot base oil prices in Asia, but lingering uncertainties generated by the COVID-19 pandemic forced many market players to take a cautious stance.
The stay-at-home orders and plant shutdowns that were implemented to control the spread of the virus have been lifted in most of the region, but there have been new spikes of infection in some countries, which have underscored the need to remain vigilant and ready to restore some of the restrictions that have just been lifted.
In India, a key base oil and lubricant market given the huge volumes that the country consumes, the number of infections has not decreased since the beginning of pandemic, and the health system has been overwhelmed by the number of hospitalizations.
Performance in many industry-related sectors such as the automotive segment remains lackluster, with car sales in India slumping to all-time lows. The automotive aftermarket spending was expected to fall by 11 percent during the 2021 fiscal year, a report by The New Indian Express said. “In two-wheelers (which constitutes a large portion of the Indian mobility market), a high proportion of aftermarket spend goes towards tire and engine oil replacement, which will be sharply lower as both are directly linked with annual running,” the report explained.
In South Korea and Japan, an increase in isolated clusters of infections has also raised red flags just days after pandemic-driven measures and a state of emergency had been lifted, causing authorities to question whether the measures should be reinstated.
The lockdowns had resulted in reduced mobility of the population, which in turn led to a dramatic drop in fuel and lubricant demand in the region. As a result, most refineries had started to cut run rates during the first quarter to manage inventories, and most continue to run their facilities at reduced rates. Regional units were running at an average of 70-75 percent operating rates, according to sources.
Industry experts explained that increasing or decreasing run rates at a refinery is not as easy as turning a dial, and requires lots of work and planning. This is one of the reasons refiners and base oil producers remain cautious about increasing operating rates, as it was still not clear whether the sudden jump in base oil requirements would be sustained.
Some participants were of the opinion that the uptick in buying interest was due to pent-up demand and the depletion of inventories during the peak of the pandemic, but once immediate requirements are fulfilled, levels may slump again.
The operating rate reductions coincided with the pickup in base oils and lubricants demand at the end of May/beginning of June, when many lockdown measures were lifted and businesses started to reopen.
A dearth of readily available spot cargoes within Asia amid climbing offer prices had driven some buyers to secure shipments in other regions, as was the case with India. Several parcels of API Group II base oils were lined up to load in the United States and the Middle East in June for shipment to Indian ports as buyers took advantage of arbitrage opportunities, while import volumes for South Korean product were expected to rise as well.
However, it remains to be seen whether after these shipments arrive and more base oils become available within Asia, India would continue to buy at the same pace.
Similarly, China has been importing more cargoes in recent weeks, as manufacturing facilities had started to reopen much earlier than in the rest of Asia, and there was more limited domestic production of base oils. Since most base stock facilities were heard to be ramping up rates in China – including test runs at a new facility – there may be a drop in the need to import products, while light grades were heard to be in ample supply from domestic suppliers as well.
One of the base oil categories that has commanded much attention in recent weeks and continues to go strong was the Group I – a segment that many experts have been predicting for years would be disappearing from the base oil landscape. The extended shutdown of a large Group I facility in Singapore, together with reduced operating rates at many other facilities in the region, including Japan and Thailand, has resulted in tight supply and rising price indications. It was heard that some offers from a southeast Asian supplier had been lifted by as much as $40-$50 per metric ton for July loading to China and Southeast Asian destinations, substantially up from June values.
The Group II segment has also seen its share of drama over the last few weeks, as the scheduled turnaround at a Taiwanese facility and the reduced run rates at South Korean base oil units has brought about a tightening of supplies and accompanying higher offers.
It was heard that Taiwanese producer Formosa Petrochemical Corp., which typically ships large quantities of Group II base oils to China both under contract and for spot sales, had started a forty-day turnaround at its Group II plant in Mai-Liao on July 3 and availability had narrowed. Consequently, Chinese buyers have turned to South Korean producers to fill the gap, with heavy grades getting particular attention.
Formosa was also understood to have lifted its domestic list prices for July shipments. The supplier marked up its Group II 70 neutral sold in Taiwan by New Taiwan Dollars (NT$) 1.80 per liter, its 150N by NT$2.00 per liter and its 500N by NT$1.3 per liter.
The Group III segment has not seen as much action as the other two main categories and the market remains structurally oversupplied, with prices reported as steady to slightly weaker. This situation may change as supplies from the Middle East were heard to be tightening.
Spot prices in Asia were generally stable to firm this week on the back of more limited supply and rising crude oil and feedstock costs, although some pockets were experiencing downward pressure due to ample availability for the time being, as was the case of the Group III segment.
Ex-tank Singapore assessments for the Group I solvent neutral 150 grade were steady at $490/t-$530/t this week, while the SN500 was at $530/t-$560/t. Bright stock was revised up by $25/t to $655/t-$685/t, all ex-tank Singapore.
The Group II 150 neutral was unchanged at $500/t-$520/t and the 500N was assessed higher by $20-30/t at $600/t-$630/t, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was heard at $420/t-$440/t, and the SN500 was assessed at $440/t-$480/t. Bright stock was up $10/t at the low end of the range to reflect this week’s discussions at $530/t-560/t, FOB Asia.
Group II 150N was steady at $440/t-$470/t FOB Asia, while the 500N and 600N cuts were gauged at $510/t-$550/t, FOB Asia.
In the Group III segment, the 4 centiStoke was unchanged at $680-$720/t and the 6cSt at $690/t-$730/t. The 8 cSt grade was hovering at $670-690/t, FOB Asia for fully approved product.
Upstream, crude oil futures eased on Wednesday as industry data showed an unexpected build in U.S. crude inventories, although gasoline and distillate inventories fell more than anticipated, data from the American Petroleum Institute showed on Tuesday.
Oil prices have traded in a narrow band over the last two weeks as concerns about a global spike in coronavirus cases tempers optimism about a recovery in fuel demand, CNBC.com reported.
The article also noted that Abu Dhabi National Oil Co. plans to boost oil exports in August, the first signal that OPEC and its allies are preparing to ease oil output cuts next month. Key ministers of the OPEC+ are scheduled to hold a meeting next week.
On Thursday, July 9, Brent September futures were trading at $42.34 per barrel on the London-based ICE Futures Europe exchange, down from $42.82/bbl on July 2.
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.
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