Escalating tensions in the Middle East and fresh evacuations of oil infrastructure in the Gulf of Mexico as Hurricane Milton barreled towards Florida this week have combined to send crude oil prices to steeper levels, placing upward pressure on base oil prices. The upward strain was offset by slowing demand and lengthening supplies, particularly those of the heavier base oil grades.
Several U.S. states were still reeling from the impact of Hurricane Helene and were again threatened by another major storm. Hurricane Milton, which started to form in the Gulf of Mexico on Saturday, was expected to be a powerful major hurricane, but was projected to only make landfall in Florida on October 9, prompting evacuations at offshore oil facilities in the Gulf–including one of Chevron’s oil and gas production platforms – and of large parts of the population in that state. Aside from evacuating and shutting down its Blind Faith platform, Chevron said that the company would implement storm preparedness protocols at its onshore facilities and closely monitor the storm’s forecast and trajectory. It was not clear if this included the company’s Group II plant in Pascagoula, Mississippi. Several other base oil plants located along the U.S. Gulf Coast were on alert but were not anticipated to be affected by Milton.
Chevron scheduled a three-week turnaround at its Group II and Group III unit in Richmond, California, this month, and was also expected to take its Pascagoula plant off-line for three weeks in the first quarter of 2025. The turnaround in Richmond was likely to have limited effect on base oil availability as the producer was expected to have built inventories ahead of the outage and a majority of other refiners were running plants at high rates, as base oil margins were considered more favorable than those of competing fuels. There was no confirmation about the turnaround schedule as the producer does not comment on the status of its base oil operations.
Last week, there was also some concern about the strike by the International Longshoremen’s Association, which shut down major ports on the East and Gulf coasts on October 1 and could have affected base oils, lubricants and additive imports and exports if extended, but the strike was suspended three days later until January 2025, when negotiations were anticipated to resume. Nevertheless, observers said it would take several days for full port operations to be restored.
With the peak demand season for automotive lubricants being over in the U.S., demand for base oils was not expected to improve significantly in the next few weeks, but this comes as no surprise as fourth quarter conditions are typically weaker than during the previous quarter. The automotive segment has shown the most erosion, but the industrial segment has fared better. Market participants characterized overall demand as “flat” to “slightly lower than the previous month,” which placed some pressure on base oil prices. However, a source noted that “the recent spike in feedstocks and ultra low sulfur diesel has buyers concerned about upward movement potential.”
Not only has domestic demand contracted, but also export activity over the last few weeks, resulting in some base oil segments seeing supply levels grow and downward pressure mount. Group I cuts were generally considered on the tight side, as production capacity has been more limited, and the Group II 100 neutral grade was also snug, but there has been a lengthening of the mid-and heavy-viscosity grades, likely tied to a seasonal demand slowdown from applications in the agricultural segment and other sectors that use fewer heavy-viscosity grades during the winter.
Group III 6 cSt and 8 cSt grades were holding their ground for the most part as conditions seemed better balanced than for the 4 cSt grade, and there was a pick-up in orders, likely caused by a narrow price difference with Group II values, which incentivized some blenders to replace Group II grades with Group III cuts whenever substitution was possible.
Naphthenic
The naphthenic base oils segment was still digesting the 20-cents-per-gallon decrease introduced by a number of producers across the board in late September, while one producer abstained from implementing a general price decrease. Downward price pressure persisted on the heavy grades as demand from the tire and rubber segment – which mainly serves the automotive industry – has declined. The lighter grades used for applications such as transformer oil were still going strong and prices received better support.
On the export front, buying appetite for U.S. Group I and Group II base oils in Brazil has been lackluster as end-users have been able to meet requirements through local production, with local prices considered competitive against U.S. offers. However, buyers were expecting U.S. spot export prices to edge down as suppliers were likely to release inventories collected ahead and during the hurricane season, although steep freight rates was still a factor hampering some deals. There were also ongoing offers of competitively-priced Group III base oils, which many Latin American buyers took advantage of.
Likewise, U.S. suppliers said that there was steady buying interest from Mexico, as local production is negligible and the country continues to be the largest importer of U.S. base oils. Nevertheless, given current pricing and import restrictions, there was little interest in base oils for diesel blending. Lubricant demand has been sluggish, but blenders were expected to try to replenish stocks during the fourth quarter when U.S. suppliers were likely to be more willing to offer “bargain-basement prices,” a source explained. “There is buying interest from Mexico if the price is right,” another source concurred.
Crude
Upstream, crude oil futures continued to be impacted by the potential of a spreading Middle East conflict. Oil prices have surged more than 7% through Tuesday’s close, since Iran fired ballistic missiles at Israel last week in retaliation for Israel’s attacks on members of the Iran-backed militant group Hezbollah. The missile offensive on Israel spurred fears that Israel might retaliate by hitting Iran’s crude industry, which would put a significant dent on Middle Eastern oil production.
Crude futures slipped on Tuesday, settling down more than 4% on news of a possible ceasefire between Hezbollah and Israel, although prices found some support on lingering fears of a potential attack on Iranian oil infrastructure. U.S. President Joe Biden has publicly discouraged Israel from hitting Iran’s oil capacity, with Israel likely to hit military and intelligence sites in Iran first, The New York Times reported.
There was also some disappointment that Chinese officials did not announce any new stimulus plans at a press briefing on Tuesday, fueling concern that without further stimulus, the Chinese economy would not grow, and this might result in reduced crude oil demand from the world’s top oil importer.
On October 8, WTI November 2024 futures settled on the Nymex at $73.57 per barrel, compared to $69.83/bbl on October 1.
Brent futures for December 2024 delivery were trading on the ICE at $77.75/bbl on October 8, compared to $75.15/bbl on October 1.
Louisiana Light Sweet crude wholesale spot prices were hovering at $80.21/bbl on October 7, from $71.25 on September 30, according to the U.S. Energy Information Administration.
Ultra low sulfur diesel futures were down 9.9 cents at $2.2972/gal on October 8, according to OPIS/PetroChemWire.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com
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