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U.S. Base Oils Riding High


U.S. Base Oils Riding High

Racing at full tilt from January through June, U.S. refiners got right up to the edge of producing 34 million barrels of lubricant base oil, according to data released at the end of August by the U.S. Energy Information Administration.

At 33.99 million barrels, U.S. refiners collectively muscled their way to an all-time high. They cleanly beat the previous record of 33.8 million barrels set in first-half 2000, historical EIA data and LubesnGreases research indicate.

Their six-month rally was blissfully unimpeded by major turnarounds or operational hiccups-unlike last year-and refiners were able to push out 10 percent more product than in first-half 2017, when base oil production totaled 30.8 million barrels.

Most of the upswing came on the paraffinics side of the market. Paraffinic refiners unleashed 29 million barrels for the period, versus 25.8 million barrels last year, a 12 percent spike.

On the naphthenics side, first-half production came to 4.99 million barrels, a dash more than the 4.93 million delivered in 2017s first six months. Ryan Eberly of pale oil supplier San Joaquin Refining in Bakersfield, California, attributed this to good demand for process oils in transformers, tires and rubber manufacturing, as well as the grease and metalworking fluid markets.

What Happened

Joe Rousmaniere of Chemlube International in Harrison, New York, credited the overall gain in production to more robust refinery operations. Last year was plagued with traumatic events, he reminded, including a bunch of major refinery turnarounds that held production down.

Those work outages sidelined the countrys largest API Group II producers for weeks in early 2017: Chevron in both Mississippi and California, Excel Paralubes in Louisiana, and Motiva in Texas. Then there was a big fire at TonenGenerals Wakayama Group I plant in Japan, which forced ExxonMobil to move as much Group I as it could into Asia, related Rousmaniere. Shells Pearl Group III plant blew up in Qatar, and finally Hurricane Harvey hit the U.S. Gulf Coast at the end of August and shut down 30 percent of all U.S. capacity for three months.

By comparison, 2018 will be remembered as the year that nothing happened, he declared.

Refineries have run far more smoothly in 2018, with only rare pauses for maintenance. Successful turnarounds were performed early in the year at HollyFrontiers Tulsa, Oklahoma, facility and San Joaquins in Bakersfield.

Crude prices were climbing for much of the period, but with domestic and global demand consistently reported as strong and supply tight-to-balanced, producers managed to impose several price hikes to keep things humming.

By summer, though, demand was wilting and inventories were swelling, prompting producers to ease first spot prices and then some postings.

Things are kind of slack now, said a base oil seller based on the Gulf Coast. But if a hurricane hits this season, at least theres a lot of oil in tanks now and we could weather the storm.

The EIA data on ending stocks of base oil tend to support that view. Stocks held in tanks at the end of each month have ranged from 11 million to 11.8 million barrels this year, while last year suppliers struggled most months to build a cushion of more than 9 million barrels.

Bubbling Exports

In 2017, more U.S. base oil was discharged to foreign markets than to domestic buyers, and the EIA data show that trend is not abating. In the first six months of 2018, 21.9 million barrels-a full 64 percent of U.S. production-was exported.

However, the EIA also has revised its 2017 monthly export figures downward. At this time last year, it was reporting first-half 2017 base oil exports at 20.9 million barrels-a tally it now puts at 17.9 million barrels. (EIA staff did not return numerous calls from LubesnGreases regarding the revised data.)

Returning to the current year, most of the first-halfs cargoes went to neighbors in the Americas. Sizeable volumes went to Argentina, Chile, Colombia, Ecuador, Jamaica and Peru, but those shipments were dwarfed by the 5 million barrels that skipped across the southern border into Mexico. Thats about 28,000 barrels a day, versus the average 17,000 b/d seen in recent years. The country is taking more Group I because Pemex, its sole native producer, has experienced operating problems at its 6,000 b/d facility in Salamanca. Mexico also is soaking up more Group II, sources say.

Brazils appetite for U.S. base oil also came back to life after several lean years, whetted by rising GDP and higher industrial activity and automotive sales. The country swallowed nearly 2 million barrels of U.S. base stocks in this years first half, versus 1.4 million in first-half 2017. Production woes at indigenous refineries operated by Petrobras further spurred the need for imports.

Europe, meanwhile, has grown into the second-biggest recipient of U.S. base oils, especially Group II. More than 2 million barrels were shipped to Belgium, while another million went to the Netherlands, Germany and France. Chevron, Motiva and ExxonMobil have established a beachhead in northern Europe for their Group II products, but observers agree that U.S. exports will face strong competition after ExxonMobil starts up its massive new Group II plant in the Netherlands. Estimated by LubesnGreases at 20,000 b/d of capacity, the Rotterdam facility is due to start commissioning by year end.

There are clear reasons why so much U.S. base oil goes abroad, said Steve Ames of SBA Consulting in Pepper Pike, Ohio. U.S. crude oil prices are much lower than elsewhere. Earlier in the year, West Texas Intermediate had been only $3 below Brent [Europes benchmark crude], but now that gap is back to $10, which gives U.S. refiners a big, big advantage on costs. Freight costs to the EU have narrowed to around $2 per ton, too. As a result, were seeing 1 million tons a year of Group II stocks going there.

Hydrogen generation is a third area where U.S. refiners enjoy a substantial advantage, thanks to cheap natural gas feedstock costs, Ames explained. Domestic demand has slowed now, he continued, but if youre a U.S. Gulf Coast refiner and you can put 10,000 tons of Group II on the water, you can compete with base oil made almost anywhere in the world, even Asia.

Rising Imports

The import side of the ledger also saw greater volumes in the first six months of the year, with a total of 8.3 million barrels brought in. Thats an 8 percent increase over the 7.7 million barrels imported in the same period in 2017. Virtually all of the base oil imports are Group III, said Chemlubes Rousmaniere.

South Korea continued as the leader, with nearly a third of the base oil imported during the first six months. Its landings were just shy of 2.6 million barrels for the period, versus 2.4 million in 2017 and 2.0 million barrels in 2016.

Refiners in the Middle East are biting off ever-larger shares, too. Qatar ranked second as a supplier, with 23 percent. Its deliveries have rebounded sharply since Shells joint venture Pearl plant returned to normal operation, and amounted to 1.9 million barrels in the first half of the year, versus only 778,000 a year earlier.

Third was Canada, with just under 1.5 million barrels in the first half; thats down from 1.9 million last year. Since the closing of Imperial Oils Strathcona facility, Canada is down to just one virgin refiner of base oils, HollyFrontiers Petro-Canada unit in Mississauga, Ontario, which makes both Group II and III.

Two newer Middle East suppliers are making inroads into the U.S. with Group III barrels, too. Adnoc, which operates a new plant in Abu Dhabi, U.A.E., began unloading its Group III in the U.S. in early 2017. Its imports hit 708,000 barrels for all of last year, but with 620,000 barrels conveyed through June, it could nearly double that this year.

Erica Snedegar of Vertex Energy in Columbus, Ohio, which works with supplier Penthol to market Adnocs base stocks in the U.S., said acceptance of the new material has grown as it secured key OEM approvals.

Another significant player in the import market, with a 5 percent share, is Bahrain, home to the joint venture Bapco Lube Oil plant owned by Bahrain Petroleum and Neste. Much of the plants output is sold in the U.S. by Neste, some is sold directly to major oil companies, and the rest was bought out this year by Chemlube with an eye to reselling it in the U.S. and elsewhere. Imports from Bahrain in the first six months amounted to 452,000 barrels, versus 500,000 barrels in the year-ago period.

Quiet Ahead?

Looking ahead, numerous sources say base oil markets are quieting as the fall season approaches. Africa, China and India dont seem to be buying as much, said Rousmaniere. It may be that the huge Gulf Coast refineries made too much. I suspect we could see a cutback in refinery runs, especially when ExxonMobil drops a million tons onto the market from Rotterdam, and other newer plants come online in China. But refiners cannot cut back too much because most plants cant operate efficiently below 60 or 65 percent of capacity.

San Joaquins Eberly added an important reminder that refining fundamentals dont always revolve around base oil demand. For us, its a case of the tail wagging the dog right now, he said. The asphalt market is strong and good, so were putting in a lot of crude to make asphalt, running at full speed-and subsequently a lot of base oil product is flowing, too.

Looking at the big picture, Gerry Jackson of Renkert Oil in The Woodlands, Texas, worries that the next big threat will be overcapacity. The U.S. market has never realized the consequences of [Chevrons] new Pascagoula plant due to growth in Group II demand in Europe and South America, he told LubesnGreases last month. There have been turnarounds and other issues, like a hurricane in 2017, that have helped manage supply, as well as a robust U.S. economy and seasonal demand from both India and the Asia Pacific markets. Its possible the full realization of the new Luberef, Adnoc and soon-to-be-commissioned Rotterdam plants are about to be felt in the marketplace.

While the world has seen a fair amount of base oil plants-mostly Group I-shut down the past several years, these smaller plants pale in comparison to the size and scope of the new generation of both Group II and Group III plants being built. Globally, we may be taking another step-change in supply, he said.

Tim Sullivan contributed to this story.

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