Can the Market Finally Breathe a Sigh of Relief?
Slowing demand, healthy supply levels, falling crude oil prices and the need to start clearing inventories at the end of the most active period of the hurricane season were thought to be behind a series of posted base oil price decreases that emerged in early September.
Some participants deemed the initiatives slightly premature, as the industry was not out of the woods in terms of severe weather exposure. Indeed, at the time of writing, a storm with the potential to become a hurricane and cause significant damage was forming in the Gulf of Mexico, and a predicted path put it over Texas and Louisiana, where several base oil plants are located.
Some players believed that the granting of steep temporary value allowances during contract negotiations in August precipitated the posted price decreases. Motiva was the first to step out with a decrease announcement, and several other API Group II and III initiatives quickly followed. At the time of writing, no Group I adjustments had been announced.
The decreases varied, depending on each producer’s supply conditions, but the higher decrease amounts generally seemed to apply to the Group II mid- and heavy-viscosity grades. Motiva lowered the posted price of its Group II 100N grade by 18 cents per gallon and its 220N and 600N grades by 40 cents/gal. The company’s Group II+ 2- and 3-cSt grades decreased by 15 cents/gal, while its Group III 4-cSt grade was revised down by 25 cents/gal and its 6- and 8-cSt grades by 15 cents/gal, effective Sept. 1.
On the same date, Excel Paralubes lowered its Group II 70N by 30 cents/gal, its 110N by 20 cents/gal, and its 220N and 600N by 40 cents/gal.
SK Enmove informed customers that the company would be reducing the posted price of its Group III 4-cSt grade by 10 cents/gal and its Group III 8-cSt grade by 18 cents/gal as of Sept. 1. The company’s Group II+ base oils and Group III 6-cSt remained unchanged.
Chevron’s Group II 100R was adjusted down by 20 cents/gal, and its 220R and 600R cuts fell by 50 cents/gal on Sept. 3.
Calumet announced a paraffinic price decrease of 18 cents/gal on its Group II 75/80N, 100N and 150N grades and 40 cents/gal on its 325N grade, which went into effect on Sept. 6.
According to reports, ExxonMobil also communicated posted price decreases, effective Sept. 7. The initiatives lowered the company’s Group II+ EHC 45 by 20 cents/gal and its Group II EHC 65 and EHC 120 by 40 cents/gal. Petro-Canada and Safety-Kleen announced similar decreases shortly after.
The posted price decreases did not come as a complete surprise; suppliers typically focus their efforts on finding buyers for additional volumes at a time when demand weakens following the end of the summer driving season. While the hurricane season is not officially over until Nov. 30, most storms occur between August and September. Shortly after this period, producers often start to offer discounts to find buyers for their surplus volumes.
A lengthening of the heavy-viscosity Group II cuts and the Group III grades started to exert downward pressure on spot prices in August. Group III supplies became more plentiful given regular shipments from Asia and the Middle East. Domestic production of Group III base oils increased earlier in the year. While most Group III producers used these base oils for their downstream operations, it resulted in additional supplies becoming available. Concurrently, steady buying interest for U.S. cargoes from Europe, Africa and Latin America supported Group I and II export prices.
There was a temporary tightening of Group II and III domestic supplies, as a refiner suffered a brief unplanned outage in late August, but the unit was restarted shortly after. A rerefiner also resumed output following a short shutdown and was expected to have limited extra base oil availability for several weeks.
Feedstock prices also declined, with vacuum gas oil values showing significant losses since the last base oil posted price increases in April. Crude oil futures plummeted by over 9% during the first week of September—the biggest weekly decline in 11 months—on expectations that Libya would resolve a dispute that led to supply disruptions and that OPEC+ could potentially increase output in October. Data showing a manufacturing slowdown in China and the U.S. also fueled oil demand concerns. On Sept. 6, West Texas Intermediate front-month futures settled on the Nymex at $67.67 per barrel, compared to $75.53/bbl on Aug. 27.
On the naphthenic base oils front, supply and demand were described as largely balanced, offering stronger support to prices than on the paraffinic side. Naphthenic base oil suppliers explained that pale oil values were less likely to be revised as prices had been comparatively lower than paraffinic values and demand had held up better as well. However, with crude oil prices having dropped significantly and demand slowing down, naphthenic suppliers eventually acquiesced and announced 20 cent-per-gallon decreases to be implemented in the second half of September.
A hurricane or other unpredictable event might cause supply disruptions and quickly turn the market on its head. But hopefully this will not be the case, and the industry will be able to enjoy generally stable conditions throughout the last quarter of the year.
Gabriela Wheeler is base oil editor for Lubes’n’Greases. Contact her at Gabriela@LubesnGreases.com