The U.S. base oil market is back to its game of trying to anticipate the next consolidation of Group I supply.
It is an activity based on a trend that has been steady for more than a decade – the shift of production from Group I to Group II and Group III stocks. Indeed, the trend has continued this year. Shell took 4,600 barrels per day of Group I capacity out of the market by closing its plant in Deer Park, Texas. In the meantime, several other suppliers added increments of Group II capacity.
But if speculation about elimination of more Group I capacity has become a constant in the market, observers say the level of anticipation has redoubled recently.
It was the biggest topic of conversation in Palm Springs, one marketer said, referring to the Independent Lubricant Manufacturers Associations annual meeting in Florida last month. Even [discussion of] pricing has taken a backseat because people are so preoccupied with wondering who is going to be the next to go.
Driving the increased amount of speculation are upcoming upgrades of specifications for passenger car and diesel engine oils and ongoing upgrades of automatic transmission fluids. All are expected to require significant increases in use of premium stocks – and corresponding decreases in use of Group I. Past upgrades had the same effect, but the industry expects a bigger impact from GF-4, the next passenger car motor oil standard, and PC-10, the next diesel upgrade. GF-4 is scheduled to be introduced for commercial service next spring, PC-10 in mid-2005.
The amount of discussion about Group I has definitely picked up, another marketer said. Everyone is trying to figure out if their supplier is going to be the next one to exit the market and where they might turn for an alternative supplier.
Almost every existing Group I supplier has been the subject of exit theories. Not surprisingly, each supplier offers their own explanation about why they are going nowhere anytime soon. Still, its hard to find anyone who does not agree that some Group I plant will be closed or upgraded. But one supplier offered this solace for worried buyers:
If and when the next Group I plant is shut down, it will be because of declining demand. So to that extent, demand and supply should remain somewhat balanced.
A large number of base oil sellers and buyers gathered in Houston this week for the National Petrochemical and Refiners Associations Lubricant and Waxes meeting. Posted prices for base oils were unchanged this week. The cost of crude oil on the New York Mercantile Exchange closed at $31.13 per barrel yesterday,$2.35 higher thana week earlier.
Historic U.S. posted base oil prices and WTI and Brent crude spot prices are available for purchase in Excel format.