Some U.S. base oil suppliers are quietly granting discounts to buyers, while others are maintaining their price indications as margins remain tight.
The discounts have emerged on the back of growing inventories and slowing demand, market sources explained. Suppliers said that while October sales had held up as expected, November and December requirements typically taper off and producers worry about finishing the year with high inventories in their hands.
There is growing awareness that supplies are getting long and buyers are therefore requesting price reductions on spot transactions for the remainder of 2013, sources said.
In some cases, sellers have acquiesced to buyers requests and have granted a two-month temporary voluntary allowance, sources added. However, term contracts or cargoes expected to ship early next year are not enjoying the same discounts, sources emphasized.
While the amount of discounts varied, it was generally understood that some reductions in the vicinity of 10 cents/gal to 15 cents/gal were taking place. In a few cases, suppliers have had to match the spot reductions to retain market share, particularly for a few large-volume accounts.
Additionally, there has been some market positioning ahead of additional capacity coming on-stream from the new Chevron plant in Pascagoula, Miss., in the first quarter of next year. While Chevron maintains that the product will be mostly sold into Latin America, South Africa and Europe, there is ongoing concern among domestic suppliers that the market will become flooded with base oil in a few months time.
Some export markets have witnessed the downward adjustment in U.S. prices, with API Group II product heard to have been sold into South America at attractive prices over the last couple of weeks.
There was little information forthcoming about the results of the recent Petroleos de Venezuela (PDVSA) tender, calling for 18,000 tons of base oils. A Group I producer said it had been asked to support some traders who planned to participate in the tender, but it appeared that it would be difficult for any one U.S. refiner to offer all of the requested products, the source added. There were expectations that the tender would be awarded to European suppliers.
In production, rumors surrounding the possible permanent shutdown of one of Motivas base oil lines are unfounded, market sources said. Motiva will be completing a six-week turnaround at one of its three base oil lines in January/February 2014, sources added. Motiva will also be performing maintenance on one of their crude units, and as a result, there will be less vacuum gasoil available. However, the producer plans to build VGO and base oil inventories to cover for the shortfall caused by the turnarounds.
Upstream, West Texas Intermediate (WTI) crude futures were trading near their lowest level in more than four months on expectations that U.S. inventories continued to swell at a time when U.S. crude production is growing.
WTI settled on the CME/Nymex at $93.37 per barrel on Tuesday, Nov. 5, down $4.83 from last Tuesdays settlement at $98.20/bbl.
Brent crude was trading at around $105.33 per barrel late yesterday on the CME, down $3.68 from $109.01 a week ago.
LLS (Light Louisiana Sweet) was trading at a premium to WTI of around $3/bbl on Nov. 5, compared with $2.10/bbl on Oct. 29.
Historic U.S. posted base oil prices and WTI and Brent crude spot prices are available for purchase in Excel format.