A great deal of market attention this week focused on the sharp crude oil price fluctuations triggered by drone attacks on two of Saudi Arabia’s main crude oil facilities over the weekend.
The attacks crippled about 50 percent of the country’s crude output, shutting down 5.7 million barrels of daily production.
Crude prices spiked on Monday, following news of the attacks, with Brent futures rising by as much as 19.5 percent in early trading to $71.95 per barrel–the biggest jump on record–and settling at $69.02/bbl.
Oil futures retreated as the week wore on when Saudi Arabia assuaged concerns about potential crude shortages by promising to restore full production by the end of September, faster than anticipated. The International Energy Agency also declined to release emergency oil stocks as markets appeared well supplied.
On Sept. 19, crude futures were up slightly, with Brent November futures trading at $65.01 per barrel on the London-based ICE Futures Europe exchange, compared to $60.45/bbl on Sept. 12.
Base oil producers were keeping an anxious eye on crude oil and feedstock numbers, as the higher levels were placing upward pressure on base stocks and squeezing margins.
However, the third and fourth quarters are usually not the most propitious time of the year to implement increases, as demand typically starts to weaken and activity in downstream lubricant market also loses some of its luster.
Suppliers often offer discounts to stimulate purchases and lower stock levels, particularly as the year-end holidays approach and they prefer to finish the year with lean inventories.
Base oil demand in other regions that are targets for Asian exports, such as Europe and the United States, also declined, making it more difficult to find takers for Asian surplus tonnage.
There was also some uncertainty surrounding the European Union’s discussions about whether to extend or revoke a duty waiver it has been granting on API Group II imports, which could have some repercussions on European uptake of Group II imports moving forward.
The relationship between the U.S. and Iran has soured further this week as U.S. president Donald Trump blamed Iran for the attacks in Saudi Arabia and declared that he would impose more sanctions on that country. Iran’s crude oil exports have already been limited by international sanctions and this escalation may result in even tighter restrictions.
Some Iranian Group I cargoes were rumored to have been exported to other Middle East countries and then re-exported to Asian destinations in recent months, but there was no evidence that this was still the case.
Some Northeast Asian producers may resort to trimming base oil production rates and stream more feedstocks into fuels output, as requirements for these products tend to increase in the winter.
Additionally, those refineries that have the ability to produce low-sulfur marine fuels may also opt for producing more of these products as demand is expected to jump, following the implementation of the International Maritime Organization’s (IMO) low-sulfur marine fuel regulations as of January 1, 2020. The IMO plans to enforce a new 0.5 percent global sulfur cap on fuel content, lowering it from the present 3.5 percent limit in response to environmental concerns.
A full turnaround at an Indian refinery may result in reduced base oil output in that country. A large refiner was heard to be planning to shut down its crude distillation unit for a routine turnaround this month. The refinery houses a Group I and Group II base oil unit, and it could not be determined whether the shutdown would affect base stock output, but the operator generally idles all of its units and processes during a bi-annual turnaround.
State-owned Indian refiners such as Indian Oil Corp. and Bharat Petroleum Corp. Ltd. have been assured that Saudi Arabia would continue supplying crude despite the recent output disruptions, S&P Global Platts reported. Saudi Arabia is India’s second-biggest crude supplier after Iraq, supplying around 19 percent of India’s oil imports last year.
There were also reports that a refinery in the Middle East was undergoing a turnaround, limiting the amount of product exported to various Asian destinations such as India and China, but further details were not forthcoming.
While base oil producers in Asia were feeling the pressure of the climbing crude oil and feedstock costs, they preferred to monitor developments and leave spot prices largely unchanged for the week, waiting for markets to stabilize and a clearer picture to emerge. Participants noted that the impact of the steeper raw materials is generally not reflected in base oil pricing overnight.
Ex-tank Singapore Group I prices for the SN150 grade were holding at $720/t-$740/t, while the SN500 was heard at $770/t-$790/t. Bright stock was unchanged at $840/t-$860/t, all ex-tank Singapore.
The Group II 150 neutral was hovering at $750/t-$770/t, while the 500N was at $760/t-$780/t, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was assessed at $600/t-$620/t, and the SN500 grade was hovering at $560/t-$580/t. Bright stock was mentioned at $740/t-$760/t, FOB Asia.
Group II 150N was steady at $560/t-$580/t FOB Asia, while the 500N and 600N cuts were also stable at $570/t-$590/t, FOB Asia.
In the Group III segment, the 4 centiStoke was gauged at $790-$820/t and the 6 cSt at $810/t-$855/t. The 8 cSt grade was unchanged at $710/t-$740/t, FOB Asia for fully-approved product.
In other market-related news, China’s National Development and Reform Commission (NDRC) increased the retail prices of gasoline and diesel on Sept. 19, local Chinese media reported.
Based on recent changes in international oil prices, the retail prices of both gasoline and diesel will be increased by 125 yuan per ton (approximately U.S.$17.61/t)
Under the current pricing mechanism, if international crude oil prices change by more than 50 yuan per ton and remain at that level for 10 working days, the prices of refined oil products such as gasoline and diesel in China will be adjusted accordingly.
Fuel prices in China may have an impact on base oil demand as they determine driving patterns and automotive oil consumption.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
LubesnGreasesshall not be liable for commercial decisions based on the contents of this report.