Base oil market activity was expected to resume at a steadier pace after slowing down over the Memorial Day holiday on May 27. Orders had shown an uptick in the weeks prior to the long weekend – which marks the unofficial start of the summer driving season – as an increased number of drivers was expected to hit the road over the holiday and over the next two months. However, participants harbored reservations about the health of the market as many feared a repeat of last year’s performance, which had been rather lackluster in the spring and summer.
One of the factors that impacted base oil pricing in March and April had been the steady climb of crude oil and feedstock prices, but values have slipped since then and were largely trading within a narrow range. “Oil prices have been rangebound for the last four weeks with demand concerns being canceled out by expectations of an OPEC+ production cut extension,” OilPrice.com reported. West Texas Intermediate (WTI) futures had jumped to multi-month highs near $85 per barrel in late March and early April, prompting base oil producers to seek posted price increases.
Crude oil futures were hovering around $78/bbl last week but jumped by more than $1 per barrel on Tuesday on a weaker U.S. dollar and expectations that OPEC+ would maintain crude supply curbs following its June 2 online meeting. The start of the summer driving season and increased gasoline demand provided further support to prices.
On Tuesday, May 28, West Texas Intermediate July 2024 futures settled at $79.83 per barrel, compared to $78.66/bbl on May 21.
Brent futures for July 2024 delivery were trading on the ICE at $84.48/bbl on May 28, compared to $82.36/barrel on May 21.
Louisiana Light Sweet crude wholesale spot prices were hovering at $80.73/barrel on May 24, from $84.09/bbl on May 20, according to the Energy Information Administration. There was no trading on May 27 due to the Memorial Day holiday.
Base oil demand had shown significant improvement in April, and had been relatively healthy in May, but suppliers were concerned that order volumes would decline in June, although export activity was anticipated to remain steady or even increase on tighter conditions in other regions. Historically, base oil demand tends to slow down in the U.S. once the summer gets underway.
The Group I segment remained snug given healthy demand from industrial and marine applications, while the Group II grades have also tightened on brisk export activity in the previous months, steady requirements from the automotive segment, and a reduction of Group II output in favor of Group III grades at those refineries that are able to switch production.
Tighter supply of Group II grades and stronger premiums over vacuum gasoil prices might encourage producers to reverse the current trend whereby Group III output had been raised on account of more attractive prices. Both Group I and Group II spot prices were exposed to upward pressure, with numbers climbing by 2 cents per gallon to 7 cents/gal week on week, depending on the grade, with bright stock seeing the steeper adjustments given limited availability. Re-refined products have been able to fill the supply gap in some cases, sources noted.
The tighter Group I and Group II base oils were also the result of a partial shutdown and maintenance work on the low-viscosity base oil lines at Motiva’s Group II plant that was completed on May 15 after a catalyst change, allowing the producer to start building inventories, according to sources. A brief turnaround at Paulsboro’s Group I unit in New Jersey earlier this month had also tightened supply in the Group I segment. Domestic orders had not been impacted by the shutdown, although exports had been limited to some extent to guarantee steady supply during and after the shutdown.
Buyers and suppliers were also in the process of building inventories ahead of possible supply disruptions caused by severe weather during the Atlantic hurricane season, which runs from June 1 until Nov. 30. Both Colorado State University and the National Oceanic and Atmospheric Association have predicted a “very active” season with above-average tropical storms, hurricanes, and major hurricanes. With the start of hurricane season just a few days away, meteorologists were already watching the U.S. Gulf Coast because of potential tropical disturbances during the first week of June. Several base oil plants are located along the U.S. Gulf coast and operations at some of these units have been affected by hurricanes in the recent past.
Looking ahead, participants expressed some concern at the fact that attractive base oil margins compared to competing fuel prices served as an incentive for refiners to maintain or even increase base oil output, which could eventually lead to an oversupply situation, exerting pressure on pricing.
In early May, Motiva and SK Enmove had communicated a decrease on Group II+ and Group III posted prices, likely to reflect actual transaction levels, which had been under pressure due to growing supplies. Group II+ and Group III prices remained exposed to downward pressure because of increased domestic production of these grades and plentiful availability from Asia and the Middle East, with spot indications for the 4 centiStoke grade moving down by about 5 cents/gal from the previous week.
In terms of exports, discussions were ongoing for shipments bound for Mexico and other Latin American destinations, and buying interest from Europe has also picked up. Negotiations for cargoes moving to India have been more muted in recent weeks given lengthening supplies, increased prices of U.S. cargoes and difficulties in making numbers work, particularly due to complicated transportation and logistics arrangements.
Similarly, buying interest from Brazil has declined compared to earlier in the year given improved production rates at a local producer’s units. Unprecedented flooding in the southern state of Rio Grande do Sul was dampening demand for base oils and lubricants. Domestic prices were edging up, encouraging some buyers to look for other options such as imports. However, the increased cost of logistics and climbing U.S. export prices were hindering some of the proposed transactions.
On the naphthenic base oil front, demand was described as healthy, with the lighter grades still showing tight conditions and the heavier grades also starting to witness increased demand from the rubber and grease segments. Exports to Central and South America were robust, while shipments to Europe and other destinations were steady.
Given the fall in crude oil prices since naphthenic base oil price increases were implemented in April, buyers have started to request discounts. However, suppliers were keeping an eye on crude oil prices and explained that values would have to fall further and remain at lower levels for some time before a more general base oil price revision would be considered.
Finished products manufacturers continued to feel the pressure of climbing base oil, additives, packaging and transportation prices, and several suppliers have announced price increases to offset the higher costs. Additive suppliers have announced price markups within a range of 8% to 10% for May implementation, while finished products suppliers have communicated increases between 10% and 15% for May and June implementation. Some of the increases were being implemented, despite consumer resistance and ongoing competition among sellers. Some suppliers were monitoring the increase implementation rates before deciding whether to join the group of those who have announced markups.
In April, Highline Warren communicated a markup of up to 10% on finished lubricants, effective May 16. Shortly after, Pinnacle Oil announced an increase on all bulk and packaged products prices of up to 12%, with an effective date of May 29. Omni Specialty Packaging announced a price increase of up to 10% on all bulk and packaged products, effective May 31. Advanced Lubrication Specialties communicated a price increase of up to 12% on all products, with an effective date of June 1. According to the company, the increase is driven by the recent hikes in raw material, production and packaging costs. Safety-Kleen also informed its customers 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.” Reliance Fluid Technologies has also announced a price increase of up to 12% on finished lubricants and packaging which will also go into effect on June 17. The company explained that the increase was necessary due to base oil and packaging increases. 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.
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.
Archived base oil price reports can be found through this link: https://www.lubesngreases.com/category/base-stocks/other/base-oil-pricing-report/
Historic and current base oil pricing data are available for purchase in Excel format.