Sales allocations, normally an extreme measure, became commonplace, and lubricant blenders were left scrambling for supply. The impact was plain to see, as six of the nations biggest lubricant marketers imposed allocations of their own – some limiting orders to as little as half of normal levels.

Now the market is well on its way to recovery. Major disruptions have been eliminated, and allocations have largely been lifted – on base oils as well as finished lubes. The market is not back to normal, however. Base oils remain exceptionally tight, and the scarcity of spare barrels is hampering efforts to rebuild the lube industrys depleted supply chain. Blenders say the situation continues to tax their businesses, and many agree it is likely to persist for months to come.

The base oil markets big problems began with a roar when Hurricane Rita struck the Texas and Louisiana coasts in September. The storm shut down four plants that together accounted for 42 percent of paraffinic capacity in the United States. The first to reopen took a month to resume production. The fourth did not restart until January.

The market had barely begun to recover when additional mishaps struck. A January fire closed half of Petro-Canadas Mississauga, Ontario, plant for more than a month. In February, a fire at the Excel Paralubes plant in Westlake, La., completely closed that facility, which remained down for more than two months. The Excel Paralubes plant was among those that had been shuttered by Rita.

The loss of so much production magnified the impact of smaller disruptions. Fire struck Ergon Refinings plant in Newell, W.Va., in March, although it continued to supply at reduced levels. SK Corp.s plant in Ulsan, South Korea – the largest source of Group III base oils for North America – was hamstrung for months by deteriorating catalyst that the company replaced in April.

Several base oil suppliers took the rare step of declaring force majeure – formally notifying customers that they could not meet contractual obligations. Others imposed sales allocations – including some that did not suffer disruptions of their own but were hurt by trading partners that did.

The disruptions wreaked havoc on the lubricant industry – not surprising considering base oils typically constitute 80 percent to 90 percent ofits finished products. Big marketers seemed particularly hard hit, as Shell, ExxonMobil, Valvoline, Chevron, ConocoPhillips and Citgo all imposed sales allocations at some point.

Now the base oil market is recovering again. No new major disruptions have struck since Excel Paralubes resumed normal operations in early April. Base oil suppliers have lifted allocations, or relaxed them to the point that customers can procure 100 percent of historical levels. The improvement in base oil availability is reflected in the fact that all major oil marketers have now lifted allocations on finished lubricants, or eased them to 100 percent. Majors declined to comment on the record, but sources throughout the industry agree availability has steadily improved.

Theres no question that the situation has improved significantly since April, said James L. Kudis, vice president of Allegheny Petroleum Products Co. in Wilmerding, Pa., and president of the Independent Lubricant Manufacturers Association. Theres a world of difference between now and what we were facing back then.

But the end of most operational disruptions has not returned the market to a normal supply-demand balance – not yet, at least. Part of the problem is that smaller disruptions continue to nick supply. An April 25 storm caused a fire that damaged a power substation serving base oil operations at ExxonMobils Baytown, Texas, plant. Part of Petro-Canadas facility closed temporarily this month for scheduled maintenance, and one of three units at Motivas Port Arthur, Texas, plant is scheduled to do likewise this month. Two naphthenic base oil plants – San Joaquin Refinings in Bakersfield, Calif., and Ergon Refinings in Vicksburg, Miss. – were hampered by equipment problems.

In some cases, deliveries were slowed by shortages of rail cars and trucks. Of bigger impact, drained inventories hampered base oil production, even after plants were back to full capacity, as the need to meet orders forced operators to shorten manufacturing runs and batches.

When your tanks are empty, you dont have the luxury of long runs, one base oil supplier explained. You keep having to switch over to other products in order to get them out the door.

But the biggest factor keeping the base oil market out of balance is on the demand side. Producers may be offering 100 percent of normal levels, but buyers want more than that. Sources say this is primarily because blenders are trying to rebuild depleted inventories. Some blenders say their base oil needs have increased from last year by double-digit levels.

Wecontinue to see very tight base oil supplies in the marketplace,Valvoline Senior VicePresident John Q. Wesley said. It is well-known that the marketplace has not recovered yet to normal inventory levels.

Some lube marketers are growing at healthy rates, although the overall market has been nearly flat. But whatever the causes, blenders looking for increased volumes of base oil say it is extremely difficult to find.

We actually have some customers whose business is growing pretty fast, an official with a contract blender said. So our needs are up, and we simply cannot find the barrels we need. If these customers grow any more I dont think were going to be able to accommodate them.

Blenders big and small say the shortage of base oils is taking a toll on their businesses. First there is the financial hit. Blenders say they are paying 20 percent to 30 percent more for purchases beyond contract volumes – and this on top of the sharp run-up in base oil prices.

Then there are logistical headaches created by not being able to obtain certain base oils – and having to use others instead. Making the odd purchase from alternate sources often requires transporting longer distances or by less efficient modes – truck instead of rail, for example. This incurs additional expense, of course. Once onsite, blenders need separate facilities to store these oils.

For more than one stock, weve had to purchase two or three alternatives in order to come up with the additional oil we need, an official with one lube blender said. Ive got 10 to 11 base stocks that I dont normally handle. I have to find storage space for all of them, and I dont have that many tanks.

This and other blenders say they have done everything from renting storage tanks to using rail cars. New storage facilities – even when makeshift – require pipes to connect with process operations.

Some blenders are already anticipating a point at which base oil supply and demand will return to balance and the prospect of a more favorable environment for buyers. Once supply chains have been replenished and demand levels off, they say the market will surely have a surplus, thanks to the massive 15,000-barrel-per-day expansion at Motivas Port Arthur plant, which came online in March. Many hope this will result in a leveling off, or even a reversal of a two-year run-up in prices.

Base oil producers have been making extremely generous margins, and its been difficult to argue with price increases, one buyer said. Things have been one-sided for a while now, but we think that situation is going to turn around.

Most blenders, however, seem unready yet to consider such potential developments. Buyers and sellers predict it will take three to six more months for the market to return to normal, and that assumes no new disruptions arise. Those in the market understand all too well now what can happen if they do.

This article is the first in a three-part series.
Next week: Oronite Works to Regain Customer Confidence
June 28: Stocking Up for Future Storms