Supply and demand seem to have a tendency to achieve balance, and even in markets that appear long, unexpected events might help attain that equilibrium. This appeared to be the case in Asia this week, as a combination of unforeseen circumstances has resulted in tightening conditions and a reduction of the supply overhang.
One of these events was Hurricane Laura, which pummeled the United States Gulf Coast with heavy rain and powerful winds late last week, forcing base oil producers with operations along the impacted areas to either shut down or reduce run rates. While a majority of affected suppliers were expected to restart or crank up rates in the next few days, producer Excel Paralubes’ API Group II plant in Lake Charles, Louisiana, may remain off-line for a yet unspecified period of time due to a power outage and damage to the refinery and the surrounding infrastructure.
U.S. Group II producers had in recent weeks shipped significant amounts of base oils to India, Singapore and other Asian destinations, and this had allowed U.S. suppliers to manage inventories well, despite of weaker domestic demand. However, given the recent supply disruptions, the amount of U.S. product available for export may be more limited now, opening the door to suppliers from other regions.
Another weather-related event that may cause production issues was Typhoon Maysak, which ripped through South Korea’s southern and eastern coasts with violent winds and heavy rains on Thursday, knocking out power to homes and businesses.
At the time of writing, the SK Lubricants Group large Group III plant in Ulsan, which lay in the path of the storm, had not reported any output issues and had not dialed back production, according to company sources. The only setback that was reported was a slight delay in loading a vessel for export, likely because South Korean ports had closed in preparation for the storm, but the cargo has since loaded.
There was no information whether other producers had been affected by Maysak, but SK and other suppliers were preparing for a second storm developing in the western Pacific Ocean, Typhoon Haishen, expected to strike South Korea and Okinawa, Japan, on Monday. Meteorologists anticipated Haishen to surpass Maysak as the strongest storm in the western Pacific so far this season.
In addition to the supply problems in the U.S., exports from the Middle East have also been reduced due to a turnaround at a Group III plant there. There were reports that Bahrain Lube Base Oil Co. had taken its Group III plant in Bahrain off-line ahead of a turnaround scheduled for October because of production issues, but this could not be confirmed.
The shutdown, together with an extended suspension of Iranian Group I exports due to international sanctions, has resulted in fewer cargoes moving to Asia from that region, particularly affecting India.
Abu-Dhabi National Oil Co. was also heard to have increased the volumes of Group III cargoes shipped to the U.S. since June, and this may have resulted in reduced availability to Asian buyers.
All of these factors might offer an opportunity for Asian suppliers to fill the gaps left by these imports, and participants expected to see an increase of South Korean, Taiwanese, Japanese and Southeast Asian shipments to India, China and other destinations in coming weeks.
China’s buying interest for imports may be slightly lower than that seen over the previous months as domestic supply has increased, while base oil consumption has declined. A substantial amount of Group I requirements have been met by Japanese imports, while Middle East, Taiwanese and South Korean barrels have fulfilled the call for Group II and III grades.
At the same time, increased amounts of Japanese Group I exports flowed into South Korea and Taiwan in June and July, coinciding with a decline in domestic demand in Japan.
Furthermore, the restart of Taiwanese producer Formosa Petrochemical’s Group II plant in August meant that there would be more base oils available for export to China, not only to meet contract commitments, but for spot business as well, at a time when a seasonal slowdown in lubricant markets may be starting to emerge.
On the other hand, supply of Group I and II from South Korea may be reduced by a turnaround at S-Oil’s plant in Onsan. The maintenance program at its Group I, II and III complex started last week and 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, a company source said.
Demand from India has surprisingly stayed at healthy levels, despite a significant increase in new coronavirus infections and signs of an economic contraction related to the pandemic. The New York Times reported that the Indian economy constricted by 23.9 percent in the second quarter – the most drastic fall in decades – as restrictions to prevent the spread of the coronavirus wiped out jobs and businesses. The construction, manufacturing and transit industries were among the hardest hit, the report said.
Another element that may impact base oils availability in Asia was the fact that numerous refiners continued to run plants at reduced rates due to the drop in consumption of jet fuel and other transportation fuels, affecting availability of feedstocks such as vacuum gas oil and trimming base oil output levels.
Spot base oil prices in Asia were largely maintained from a week ago, with fairly stable crude oil prices and a tightening market scenario providing support. Bright stock FOB Asia prices strengthened on the back of strong demand and limited supply options.
Ex-tank Singapore assessments for the Group I solvent neutral 150 grade were unchanged at $490/t-$530/t, and the SN500 was holding at $585/t-$625/t. Bright stock was assessed higher last week, but was stable at $675/t-$710/t, all ex-tank Singapore this week.
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 hovering at $420/t-$440/t, and the SN500 was holding at $500/t-$540/t. Bright stock moved up by $10/t to $590/t-630/t, FOB Asia.
Group II 150N was heard at $450/t-$480/t FOB Asia, while the 500N and 600N cuts were steady at $540/t-$580/t, FOB Asia.
In the Group III segment, the 4 centiStoke was assessed at $680-$720/t and the 6cSt at $690/t-$730/t. The 8 cSt grade was stable at $670-690/t, FOB Asia for fully approved product.
Upstream, crude oil futures tumbled in early trading on Thursday on expectations that refinery demand for crude would decline in the fall, and on movements by investors to seek refuge in a stronger dollar.
On Thursday, Sept. 3, Brent November futures were trading at $43.62 per barrel on the London-based ICE Futures Europe exchange, from $45.72/bbl for October futures on Aug. 27.
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.