Market activity was understandably slow in the U.S. base oil market ahead of the holidays, but the short respite allowed many buyers and sellers to take a look at the past year and ponder what lies ahead in 2014.
A number of participants said that while 2013 has not been a bad year overall, most agreed that it had brought weaker margins than 2012, which some considered to be a fairly strong year in terms of sales results.
On the other hand, widespread economic uncertainties had led to reduced automotive demand in many countries and a related dip in base oil requirements in the second half of 2012, a trend that lingered into 2013.
A majority of players was concerned that 2014 would be a difficult year as more API Group II product would be introduced into the domestic supply system from the new Chevron plant in Pascagoula, La., not to mention other planned expansions and new projects elsewhere in the world.
Some industry experts predicted that it would take about two years for the market to absorb the additional product, even though worldwide demand for Group II material is growing, particularly in the automotive industry where stricter fuel economy and emission standards are being followed. However, within the U.S., experts said that finished lubes demand from the automotive sector was actually shrinking.
Many hoped that most of the extra U.S. product from the new Chevron plant would be shipped overseas, as the producer indicated that the base oil would be destined to meet demand in Latin America, Europe and Africa.
There were also predictions that a number of Group I facilities would be closing in 2014, namely in Europe.
It was not yet clear what specific strategies U.S. suppliers would be using to fend against market repositioning in the new year, but many confirmed that the game had already begun. A couple of suppliers said that their long-term customers had been approached by other sellers in search of new business opportunities for next year.
Most producers instituted different action plans to manage inventories in the fourth quarter, when demand started to dwindle as it is bound to do at this time of the year. Temporary voluntary allowances (TVAs) to large accounts were offered and spot pricing saw some reductions over concluded contract prices in order to encourage orders, but there is no evidence yet that suppliers are planning to implement similar programs in the first quarter of 2014.
In fact, sources said that suppliers had been able to attain well-balanced inventories and were therefore removing some of the TVAs that had been offered in November.
Likewise, availability appeared to have tightened and large parcel offers at pricing well below contract numbers seemed to have been removed from the market.
These strategies also allowed producers to maintain stable posted pricing, both on the paraffinic and naphthenic sides, even though crude oil and feedstock prices remained volatile.
Given a series of turnarounds in Q1, a few producers were already monitoring sales in order to ensure adequate supply levels during the outages. Among the paraffinic producers, Calumet will be performing maintenance at its plants hydrotreater in Shreveport, La., for 20 days, starting in the first week of March. The turnaround is expected to affect production of the producers 325 and 700 cuts only.
Motiva will be shutting down one of its three Group II trains in Port Arthur, Texas, for six weeks in January/February 2014, and Paulsboro is also expected to perform maintenance work on its Group I plant in New Jersey towards the end of the first quarter, sources said.
On the naphthenics side, San Joaquin Refining will shut down its 8,100 barrels per day naphthenic plant in Bakersfield, Calif., for two weeks in late February for routine maintenance.
Upstream, West Texas Intermediate (WTI) crude futures were trading near their highest level in two months on expectations that economic growth will be sustained in the U.S. Positive data released by the Department of Commerce showed that third-quarter GDP increased at a 4.1 percent annualized rate, up from an earlier estimate of 3.6 percent.
WTI settled on the CME/Nymex at $ 98.91 per barrel on Monday, Dec. 23, up $1.69 from the previous Tuesdays settlement at $97.22/bbl.
Brent crude was trading around $ 111.56 per barrel on the CME, up/down $1.15 from $110.41/bbl a week ago.
LLS (Light Louisiana Sweet) was trading at a premium to WTI of around $5.60/bbl on Dec. 19, compared with $5.15/bbl on Dec. 16.
Historic U.S. posted base oil prices and WTI and Brent crude spot prices are available for purchase in Excel format.