When No News is Good News
In the U.S., President Donald Trump reached preliminary trade pacts with some nations, but was unable to attain agreements with several others, driving him to impose hefty tariffs on partners such as Canada. However, base oils imported from Canada were not expected to be subject to tariffs as long as they complied with the U.S.-Mexico-Canada Agreement, which was still in effect at the time of writing. Similarly, base oil imports from South Korea were anticipated to be exempt from the new tariffs beginning in August because they fall under the energy products classification, which was established as a duty-free category back in April. Nevertheless, market participants said that the situation was fluid and that they were still awaiting clarification.
In contrast, the base oils market seemed to saunter along quietly, with posted prices remaining fairly stable, supported by a balanced-to-tight supply and demand ratio. Even a late July announcement by Motiva calling for a 50-cents- per-gallon posted price decrease turned out to be a non-event as the adjustment was later retracted, causing less than a ripple in the otherwise calm market environment.
With a majority of base oil plants running well and several turnarounds having been completed — both in the Americas as well as in other regions — a majority of base stocks attained more balanced conditions than during the first half of the year, when some segments had tightened considerably. By late July, a few cuts had started to lengthen, particularly in the API Group II segment, exerting downward pressure on spot indications.
Domestic demand for Group I and Group II base oils was lackluster, with some segments such as the agricultural sector seeing reduced consumption from heavy-duty applications given adverse weather in some areas, and farm work disruptions due to immigration raids. Uncertainties over tariffs and the U.S. economy dampened activity in the automotive industry which draws significant volumes of Group III grades. U.S. producers also continued to look for export opportunities to find a home for their extra base oil barrels.
Suppliers were comfortably able to meet contractual obligations and hold additional stocks in case of weather-related output disruptions during the height of the hurricane season along the U.S. Gulf Coast. Blenders were keeping a close eye on immediate product needs without losing sight of macroeconomic developments. They were concerned about possible tariffs on some inputs such as additives from Europe and other origins, but the rules were still unclear and further details were expected to emerge over the next few months.
Some market attention focused on the ongoing geopolitical tensions and their effects on crude oil and feedstock prices. Futures had strengthened in July as President Trump threatened to impose secondary sanctions on Russian oil exports, fanning concerns about reduced supply levels. However, prices fell in early August after the OPEC+ bloc announced that it would move ahead with another large output increase in September. West Texas Intermediate was hovering near $68 per barrel in early July and slipped to around $64/bbl the first week of August.
On the naphthenic base oils front, a largely balanced supply and demand scenario supported stable prices, with participants monitoring crude oil and feedstock values closely as significantly higher or lower prices sustained over a longer period could eventually impact pale oil prices.
Ergon had started to build inventories ahead of a six-week turnaround at its naphthenic base oils plant in September, and spot supplies declined slightly. Following the turnaround, supplies of the heavy-viscosity grades were anticipated to grow as domestic demand from the rubber and tire industries was lackluster, while the lighter grades enjoyed healthy requirements, particularly for transformer oils, supporting largely unchanged pricing.
With the summer driving season ending on Labor Day in early September and lubricant demand set to decline, base oil activity levels were expected to become rather dull. But participants would be happy not to make the headlines as long as the market continued on a steady course, and there were no unpredictable or devastating events such as a major hurricane to disrupt the temperate business environment and stable posted price structure observed for most of the year.
Gabriela Wheeler is base oil editor for Lubes’n’Greases. Contact her at Gabriela@LubesnGreases.com