Proceed with Caution
Most market participants said the biggest headache for the base oil business in mid-May was the uncertainty related to crude oil and feedstock pricing in the face of international bans on Russian exports of crude and refined products.
The United States, the European Union and several other countries have implemented a series of punitive measures against Russian energy products since the country invaded Ukraine in February. These were expected to tighten global supply for the foreseeable future.
Aside from dealing with persistently volatile crude prices, base oil producers were facing uncertainties related to feedstock supplies. Availability of vacuum gas oil was anticipated to dwindle due to the U.S. ban on imports of Russian oil and refined products. In May, most refineries were running at optimum rates, but sources warned that a tightening of VGO may be felt soon.
Rerefiners also mentioned that there was increased competition for used oil—which they use as a feedstock—since many companies in Europe were switching from natural gas to used oil due to Russian gas supply disruptions.
Other factors that continued to influence the market were the widespread lockdowns and other pandemic-related measures implemented by the Chinese government to comply with its zero-COVID policies. The lockdowns and massive testing in Shanghai and other cities resulted in factories and offices being closed and a disruption in the supply chain of multiple products, along with marine transportation issues and climbing freight rates in all regions.
While these were issues likely to afflict the global markets from a trading perspective, in North America the immediate effect was an unprecedented number of posted price adjustments in the first five months of the year.
Gone are the days of four to five price revisions in a whole year. So far in 2022, various base oil producers have initiated a total of four upward adjustments for Group I and Group II base oils, reflecting the turmoil brought about by crude and feedstock price volatility.
Added to the mix was the tightening of supplies, partly because of healthy demand but also due to production decisions at the refinery level. Given steep fuel prices, refinery operators chose to direct more feedstocks into the fuel stream, thereby reducing base oil output. Through the copious posted price increases, base oil managers hoped to improve margins to encourage production.
Domestic base oil supply was tight in mid-May; demand had been steady and was likely to climb, since both buyers and suppliers bolster inventories ahead of the Atlantic basin hurricane season, which runs from June 1 until November 30. Most suppliers restricted shipments to contract volumes and were hesitant to entertain spot opportunities. Buyers who typically were more reluctant to commit to volumes ahead of time now appeared eager to secure contract shipments until the end of the year.
These market conditions first prompted suppliers to raise postings by 15, 20, 25 and 30 cents per gallon, depending on the grade and the producer, between April 15 and April 25. Less than a month later, Excel Paralubes communicated another posted price increase of 15 cents per gallon on its API Group II light-viscosity grade, 20 cents on its mid-vis cut and 25 cents on its heavy-viscosity grade, with an effective date of May 4. Shortly after, other producers implemented increases between 20 and 70 cents per gallon.
For naphthenic base oils, prices were stable, but upward pressure continued to be exerted by firm crude oil and feedstock costs. Further price support was offered by a balanced-to-tight supply and demand scenario.
There was increased buying interest for U.S. pale oils from South America, as exports from Europe were expected to be throttled by decreasing feedstock supplies due to the sanctions on Russia. This situation was expected to deteriorate in coming weeks.
In downstream segments, lubricant, grease and other finished product manufacturers continued to face additive and raw material shortages and escalating production costs. As a result, several major and independent lubricant producers announced a round of list price increases of 8%-10%, with implementation dates between May 27 and July 1. There have been three rounds of increases in these segments since January, highlighting how market uncertainties have impacted price behavior.
It is unclear what lies on the road ahead. A traffic sign telling drivers to “Proceed with Caution” is not necessarily warning them about a specific danger but encouraging them to be ready for an unanticipated incident around the next corner. Base oil market participants should take heed.
Gabriela Wheeler is base oil editor for Lubes’n’Greases. Contact her at Gabriela@LubesnGreases.com