Global base oil supply tightened in recent weeks due to trimmed operating rates at a large number of plants, combined with a spike in demand following weaker uptake during the first stages of the coronavirus pandemic. The snug conditions may be exacerbated by shutdowns and the scaling back of operations along the United States Gulf Coast as two tropical storms threatened several refineries and base oil plants located in their path.
The first weather system to move into the area was Tropical Storm Marco, and while it did not appear to have caused much damage, it had triggered contingency plans at several refineries and oil platforms.
Laura, which strengthened into a Category 4 Hurricane as it approached the Texas-Louisiana border on Wednesday evening, forced thousands of people to evacuate, and was expected to pound the area with 150 mile per hour (approximately 240 kilometers) winds and a 20-feet (or 6.1 meters) storm surge, according to forecasts by the National Hurricane Center.
Producers who operate large refineries and base oil plants such as Motiva in Port Arthur, Texas, and Excel Paralubes in Lake Charles, Louisiana, were heard to have shut down, while ExxonMobil reduced operating rates at its Beaumont, Texas, refining complex, which includes a polyalphaolefin plant and a finished lubricant blending facility. Calumet was throttling back operations at its plant in Shreveport, Louisiana, which produces API Group I, Group II and naphthenic base stocks.
Several ports along the U.S. Gulf Coast, including those in Texas, were closed ahead of the storms.
Back in August 2017, when Hurricane Harvey put several base oil units out of commission and disrupted base oil transportation out of the U.S. Gulf Coast, there was an increased need of imports from Europe and Asia, causing a worldwide tightening of supplies.
Asia has also seen its share of severe weather, with flooding along the Yangtze River in China crippling commodity production and bringing significant economic losses; heavy monsoon rains in large parts of India leading to ruined crops and logistical issues, and a typhoon barreling through the Korean Peninsula this week causing power outages and transportation disruptions. These problems resulted in delays of base oil shipments from countries such as South Korea, sources noted.
Meanwhile, the extended turnaround at a major Group I plant in Singapore prompted the producer to move additional volumes from the U.S. and Europe to Asia to meet customer demand, contributing to the dearth of Group I grades at those origins, sources said.
Additionally, a large producer of Group I and II base oils – which are already in limited supply in the region – prepared to start a turnaround in South Korea. S-Oil confirmed that it would be starting a planned maintenance program at its Group I, II and III complex in Onsan this week that will last until mid-September. The shutdown would only affect Group I and II production, and the producer has built inventories to cover contract obligations during the outage.
Given the tight conditions observed in the market, spot prices edged up, while buyers opted for taking the full amounts of volumes agreed under contract to avoid some of the hikes.
Base oil demand in the key market India was described as healthy, despite expectations that the market would be saturated by recent shipments from the Middle East, Northeast Asia and the U.S. Whether the trend will be sustained was difficult to predict, as demand tends to slow down in the last quarter of the year, following a number of national festivals, according to sources.
In China, base oil consumption experienced an uptick in June and July as manufacturing facilities returned to full production, and the automotive industry showed an increase in demand for passenger cars and heavy-duty vehicles, but the momentum seemed to be petering out.
The restart of Formosa’s Petrochemical‘s Group II plant in Taiwan earlier this month also meant that additional base oil barrels would be available for shipment to China in coming weeks. Additionally, plentiful domestic supply reduced the dependability of Chinese buyers on imported cargoes.
The Group I segment remained particularly tight in Asia, with some cargoes of Thai origin heard to be moving to various destinations within the regions and even the Middle East. This may have been related to unplanned production issues at a Middle East plant, sources said.
Spot prices in Asia were assessed as stable to higher this week as sellers were targeting steeper prices on account of the snug conditions and firm feedstock costs.
Ex-tank Singapore assessments for the Group I solvent neutral 150 grade were unchanged at $490/t-$530/t, and the SN500 was also steady at $585/t-$625/t, but bright stock edged up by $10/t to $675/t-$710/t, all ex-tank Singapore.
The Group II 150 neutral was holding at $500/t-$520/t, and the 500N was heard at $660/t-$690/t, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was stable at $420/t-$440/t, and the SN500 was holding at $500/t-$540/t on tight conditions. Bright stock was firm at $580/t-620/t, FOB Asia.
Group II 150N was assessed higher by $10/t at $450/t-$480/t FOB Asia, while the 500N and 600N cuts also edged up by $10/t to $540/t-$580/t, FOB Asia.
In the Group III segment, the 4 centiStoke was hovering at $680-$720/t and the 6cSt at $690/t-$730/t. The 8 cSt grade was heard at $670-690/t, FOB Asia for fully approved product.
Upstream, crude oil futures climbed in anticipation of reduced supply, given the shutdown of most offshore output by U.S. producers in the Gulf of Mexico ahead of Hurricane Laura. However, gains were capped by concerns over the increasing number of coronavirus cases around the world, which could result in a drop in oil demand.
On Thursday, Aug. 27, Brent October futures were trading at $45.72 per barrel on the London-based ICE Futures Europe exchange, from $44.93/bbl on Aug. 20.
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.