Base oil demand has shown a healthy uptick over the last two weeks, as blenders bolster inventories for the summer driving season and ahead of the start of the Atlantic hurricane season, which runs from June 1 to Nov. 30 each year. Both consumers and producers like to keep extra supplies on hand in case of production disruptions caused by severe weather, even though the volumes that participants like to maintain seem to be lower compared to those they used to keep in the past.
Given these factors, base oil requirements have improved and seemed to be performing better than in 2023, when demand remained lackluster for most of the year, as opposed to 2021 and 2022, when it had been robust. This was partly attributed to pent-up demand during those two years, following the lifting of pandemic-related lockdowns – a period when a reduced number of drivers had been on the road. While most people have returned to their work places, many are still working from home, and this seemed to continue impacting fuel and lubricant demand.
At the same time, there were expectations of a strong Memorial Day weekend, with the American Automobile Association forecasting that nearly 44 million Americans will travel over the weekend – the highest number in nearly two decades, OilPrice.com reported. Memorial Day falls on May 27 in the U.S. Road trips were anticipated to be the most popular mode of travel, with a projected 38.4 million people hitting the road. “This surge in travel suggests a strong rebound from the pandemic and a busy summer travel season ahead,” the report concluded.
Suppliers concurred that both the arrival of the summer driving season and upcoming hurricane months had prompted buyers to seek more base oil supplies. “The outlook heading into the summer is good as well,” a source remarked. In the API Group I segment, a supplier said that there had been steady demand from the industrial and marine sectors since the first quarter, and that Group I may not be as impacted by summer driving as the Group II and Group III segments. Group I in the U.S. can see a slight decrease when winter cruise season ends and the ships leave for the Mediterranean, hence there might be an increase in Group I requirements in Europe.
A partial shutdown and maintenance work on the low-viscosity base oil lines at a Group II plant, and a brief turnaround at Paulsboro’s Group I unit in New Jersey this month have tightened supply in these segments as well. Paulsboro was expected to complete the shutdown and resume production by next week. The company has sufficient inventory to cover requirements from domestic customers, and no orders had been impacted by the shutdown, although exports had been limited to some extent to ensure the producer has plentiful stocks through June.
While the Group I and Group II segments were fairly balanced, supporting recent price increase initiatives, the Group II+/Group III sectors have started to show signs of lengthening, prompting suppliers to announce posted price decreases. Aside from increased availability of Group III imports, North American producers have also increased output at their plants, while reducing Group II supplies, as the Group II segment had become oversupplied.
Group III prices were exposed to downward pressure given plentiful domestic supplies and the ample availability of imports from Asia and the Middle East. Sources said that the additional Group III production in the U.S. was placing pressure on prices and this situation was not likely to be reversed because diesel margins have not been as attractive as base oil margins, therefore refiners generally continued to favor base oil output. However, Group II demand had not been as robust as anticipated, and inventories had grown. Producers with the ability to switch to Group III production have started to produce more Group III volumes, thereby helping the Group II segment come into balance, but heightening the Group III oversupply in the process. The growing supplies were compared to a runaway train that may be difficult to slow down. Suppliers were hoping that inventory building ahead of the hurricane season would take some of the pressure off most base oil segments. Significantly reducing operating rates was not considered a viable option as running a refinery at low rates can damage the equipment, a source commented.
In the U.S., Motiva announced that it would be reducing its two Group II+ posted prices by 15 cents per gallon, its Group III 4 cSt by 50 cents/gal, and its 6 cSt and 8 cSt grades by 30 cents/gal as of May 1.
SK Enmove lowered its postings retroactively, with an effective date of May 1. The posted price of SK’s Group II+ 70N grade was reduced by 15 cents per gallon; its Group III 4 centiStoke grade edged down by 20 cents/gal, its 6 cSt by 10 cents/gal and its 8 cSt by 50 cents/gal.
These decreases contrasted the posted price increases implemented on Group I and Group II between April 11 and April 19, which were predominantly driven by steeper crude oil and feedstock prices. The April increase initiatives came on the heels of a previous round of increases that was implemented between March 15 and April 1 by a majority of suppliers, with the exception of a U.S. producer and a South Korean supplier.
On the naphthenic base oils front, producers Calumet, Ergon, Process Oils – an affiliate of Ergon that markets Cross Oil products – and San Joaquin Refining also raised naphthenic base oil prices by 30 cents/gal and 35 cents/gal in April. A snug supply and demand balance and higher crude oil values had prompted these initiatives, which were implemented between April 15 and April 22. Demand of the lighter grades continued to be described as healthy, while consumption of the heavier grades has increased as well, but has also drawn competitive movements among suppliers. Fairly steady export activity to destinations in Europe and Latin America also tightened U.S. supplies.
Crude oil prices have shown fluctuations over the last three weeks, softening in early May, but strengthening again last week on data from the U.S. and China pointing to demand in the world’s two biggest crude-consuming nations possibly strengthening. Prices were also swayed by developments linked to the Israel-Hamas conflict, with a ceasefire agreement still appearing uncertain. While Israel’s War Cabinet voted to continue military operations in Gaza, it also sent a delegation to Egypt to continue cease-fire talks last week. Hamas accepted a cease-fire proposal that Israel rejected.
Oil prices settled lower on Tuesday, after U.S. inflation data fueled concerns about lingering high interest rates, but potential risks to supply from tensions in the Middle East and wildfires in Canada stalled a further decline.
On Tuesday, May 14, West Texas Intermediate June 2024 futures settled on the Nymex at $78.02 per barrel, compared to $78.38/bbl on May 7.
Brent futures for July 2024 delivery were trading on the ICE at $82.86 on May 14, compared to $82.92/barrel on May 7.
Louisiana Light Sweet crude wholesale spot prices were hovering at $83.46/barrel on May 13, from $82.90/bbl on May 6, according to the Energy Information Administration.
In terms of base oil exports, sources said that some pockets of the market have tightened because of steady buying interest from Brazil, Mexico, other countries in Latin America, Europe, India and the Middle East, although buying interest from Brazil and India has softened compared to earlier in the year. Brazilian consumers preferred to secure Group I material from domestic sources due to lower pricing and fewer logistical issues, but there was still fairly keen buying apetite for Group III grades. There was talk about some re-exported Group III cargoes from India being offered into Brazil and other destinations in the Americas at competitive levels.
Sellers noted that they had seen more inquiries from Mexico, particularly for the Group II light grades, and that additional light-viscosity greades were moving there despite the stricter import rules pertaining base oils used for fuel blending. This uptick might not only have been triggered by actual downstream demand, but by a desire to secure more inventory ahead of potential price hikes, as prices have been trending up in Mexico quickly. “Buyers are doing all they can to keep prices low,” a source explained, but it did not appear that they were able to obtain product at the softer levels seen in previous weeks.
In downstream markets, additional finished products manufacturers announced price increases, prompted by a need to offset the climbing price of base oils, additives and other production costs. Additive suppliers announced price increases in the realm of 8% to 10% for May implementation. This week, Omni Specialty Packaging announced a price increase of up to 10% on all bulk and packaged products, effective May 31. Safety-Kleen also informed its customers this week that the company would be increasing prices on all lubricants and related products by up to 12%, effective June 17, “due to increases in the cost of raw materials.” Advanced Lubrication Specialties communicated a price increase of up to 12% on all products, with an effective date of June 1. The increase is driven by the recent hikes in raw material, production and packaging costs.
Back in April, Highline Warren communicated a markup of up to 10% on finished lubricants, effective May 16. Last week, Pinnacle Oil announced an increase on all bulk and packaged products prices of up to 12%, with an effective date of May 29. Among the major lubricant manufacturers, ExxonMobil was reported to have communicated a finished lubricant price increase of up to 15%, with an effective date of May 22. Some participants expected buyer resistance to the initiatives because a number of suppliers have granted special discounts to protect accounts and competitive pricing situations persisted.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
Lubes’n’Greases Publications shall not be liable for commercial decisions based on the contents of this report.
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