While base oil demand has slowed down, as most participants seemed comfortable with the inventories they have built and were holding enough product to keep operations running, the market was generally balanced-to-tight, depending on the grade being discussed. Postings also seemed to have been impervious to the sharp crude oil price swings observed the previous week and were largely steady.
Base oil producers and consumers alike focused on building and maintaining inventories to meet requirements in case of output disruptions during hurricane season in the Atlantic Basin. This year, weather forecasters, including the National Oceanic and Atmospheric Administration, predicted an extremely active season that “could rank among the busiest on record,” fanning fears of possible product shortages during and after a potential severe weather system.
Most hurricanes occur August to September, but Hurricane Beryl arrived early in the season as it hit the Caribbean and the U.S. Gulf Coast the first week of July. While the storm caused several fatalities, flooding and widespread power outages in Texas – leading to temporary port, terminal and plant closures – most facilities were unharmed.
Then came Tropical Storm Debby, which first slammed Florida on August 5 with torrential rain and high winds, later moving on to Georgia, the Carolinas and up the Eastern Seaboard. However, it did not affect base oil production as no plants lay in its direct path.
Base oil industry participants were expected to hold on to current stocks until the hurricane season ends, and many suppliers have expressed concerns about the fact that once the season is over, there will be more product released into the market, potentially placing downward pressure on prices. For the time being, however, base oil producers seemed to be standing by their posted prices and no adjustments have been announced, despite recent drops in crude oil values.
Crude
Crude oil futures plunged to multi-month lows last week as equity markets reacted to news that the U.S. economy could slip into a recession, but prices recovered shortly after the recession fears eased and market attention turned to the ongoing conflict between Iran and Israel. Futures jumped by more than 3% on Monday, rising for a fifth consecutive session, after the U.S. sent a guided missile submarine to the Middle East as the region braces for possible attacks on Israel by Iran and its allies. Should the conflict spread to other countries in the region, crude oil production might be affected.
Brent saw its biggest percentage gain for a single trading session this year on Monday, Reuters reported. However, futures slipped on Tuesday as slowing global demand, particularly evident in China, overshadowed tensions between Iran and Israel. Brent futures for October 2024 delivery were trading on the ICE at $80.69/bbl on August 13, compared to $76.32/bbl on August 6.
On August 13, WTI September 2024 futures settled on the Nymex at $78.35 per barrel, compared to $73.20/bbl on August 6.
Louisiana Light Sweet crude wholesale spot prices were hovering at $83.40/bbl on August 12, from $76.36/bbl on August 5, according to the U.S. Energy Information Administration.
Demand
API Group I and Group II availability continued to be described as snug, even though most refiners were running plants at high rates because of attractive base oil margins compared to competing fuels. This situation may change if supplies start to build and producers opt for reducing operating rates to protect margins. A majority of suppliers have been able to fulfill contractual obligations, but spot supplies of certain grades, such as Group II 100 neutral, were limited, supporting the current spot values. Group II 220N and 600N grades were more plentiful, with the 220N starting to show some length.
Another base stock that has been outpacing consumption levels was Group III 4 cSt grade, which was exerting downward pressure on spot pricing. This grade had been fairly tight until a month ago due to the delayed arrival of a vessel carrying Middle Eastern Group III products but following the delivery of the cargo and the expected arrival of another cargo at the end of the month, there appeared to be ample supply of this grade. Additionally, domestic production of Group III grades has added to the general availability of these cuts at a time when demand has started to soften, and prices for all Group III grades were exposed to downward pressure.
Exports
Export activity involving Group I and Group II base oils has declined compared to the first few months of the year, as spot prices edged up and domestic availability tightened since June, leaving fewer barrels for export business. Nevertheless, there continued to be discussions between U.S. sellers and buyers in Europe, Mexico, and West Coast South America, with some buying interest also noted in Africa, but the gap between bids and offers was difficult to close in most instances.
Demand for U.S. cargoes from Brazil was expected to pick up over the next few weeks as inventories were deemed on the low side in that country, and the renewed buying interest might help offset some of the expected decline in U.S. domestic demand. There were reports of a Group I supplier negotiating possible shipments to Europe as well. Mexican buying appetite has abated, particularly as buyers were able to secure enough product to cover immediate needs and preferred to wait for availability to grow in the U.S. at the end of the summer.
Naphthenics
On the naphthenic base oils front, suppliers acknowledged that demand for the heavier grades had started to weaken on seasonal patterns but added that the drop had not been dramatic and that all segments were mostly balanced. A naphthenic supplier that had suffered some production setbacks a few weeks ago has been able to start building inventories. However, suppliers noted that while it had been more difficult to secure orders over the summer than earlier in the year, August was turning out to be a better month than July.
Just like on the paraffinic side, pale oil producers have been monitoring crude oil prices closely and explained that the recent price downturn had not been sustained long enough or had been substantial enough to justify base oil price adjustments.
Both the paraffinic and naphthenic base oil segments have been affected by lackluster downstream demand for finished products, which has prompted blenders to remain cautious about base oil orders. Most buyers preferred to maintain enough inventories to run day-to-day operations and have some extra product in case of output disruptions, but many could not afford to keep idle inventories. Most blenders have encountered difficulties in transferring the base oil and additive price increases implemented back in March and April, and many have had to acquiesce to discounts on finished products to protect market share.
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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