OUTLOOK ’10: Base oil volumes remain uncertain, recovery elusive

04 January 2010 18:30  [Source: ICIS news]

Uncertainty looms in US base oilsHOUSTON (ICIS news)--A recovery in the US base oils market could be years away, while near-term volume forecasts remain uncertain.

Market recovery all comes down to the rate at which demand picks up. Most players are predicting a gradual 10% increase over 2009 but have little certainty this will hold.

“We are telling our suppliers we will need 10% more in volumes for 2010 now, but this could very well change at the end of the first quarter when we get a better idea how our downstream demand will pan out,” a major buyer of Group I, II, III and naphthenic base stocks said.

A supplier said that even a 10% increase in demand will not push the US base oil market to 2007 volume levels. In fact, a true recovery could still be a few years away.

The downturn in global lubricant demand that began in 2007 will be over in 2012 when consumption returns to around 39.2m tonnes, a consultant with Kline Group said.

“Our view is that this is going to be a five-year recovery,” said Bill Downey, vice president for energy at the international consultancy.

The trough will represent a cumulative 17% reduction in lubricants demand during the five-year period, he said.

US base oil production in the first half of 2009 sank to its lowest level since 1983, according to the US Energy Information Administration (EIA).

Paraffinic base oil refiners produced 21.2m bbl of base oils from January to June, compared with 28.2m bbl during the same period in 2008. Players said the 25% decline was a result of Marathon and Citgo leaving the base oil business as well as weak demand.

“Prices reacted to the market by flat lining in 2009,” a supplier said. “Sellers seemed to be more concerned about maintaining market share than improving margins.”

Five major industry-wide paraffinic base oil price changes took place in 2009, with the last one in July bringing ExxonMobil’s posted price for brightstock to $3.02/gal FOB (free on board) US Gulf, according to data from global chemical market intelligence service ICIS pricing.

In 2008, players took in double that in price changes, pencilling in at least 10 adjustments before 2009 began.

Players did not see much in the way of a demand upturn at the end of the second quarter. There were stronger signs at the end of the third quarter, but the overall picture remained erratic in the fourth quarter.

The biggest demand shift came in August. In the all-important automobile-related product chains that are so vital to the health of the market, there were signs of restocking which temporarily helped prop up demand.

Signs worldwide that industrial activity was increasing slowly led to better demand for high viscosity base stocks. However, concerns remain about the sustainability of industrial output.

Meanwhile, an improved economy and the “Cash for Clunkers” programme in the US led to a demand surge for the heavy viscosity base oils from the downstream process oil sector beginning in August.

Gross domestic product expanded at a 3.5% seasonally adjusted annual rate in the quarter ended in September, a rise that leaned heavily on government spending. Some of the largest components of growth came from spending on cars and house building - two areas propped up by federal programmes.

Downey said that GDP is not a strong predictor of lubricants demand in the developed world in particular, because those economies have significant service and government components that do not consume much in the way of lubricants.

The four economic areas that industry participants should be watching most closely are the industrial/manufacturing sector, agriculture and construction, imports and exports and the number of miles being driven, he said.

Kline's analysis sees the US economy headed into a recovery, but one that will lag the rest of the world as a whole and Brazil in particular, Downey said.

But even with demand at improved levels compared with the first part of 2009, production remains reduced and is not likely to increase soon, a producer said, adding that several plants would begin turnarounds during first quarter 2010.

Most Group I plants ran below capacity due to limited availability of feedstock vacuum gas oil (VGO) in 2009. Weak fuels demand - in particular distillates – means there is less VGO available for the base oil side of the business.

Meanwhile, talk of another Group I base oil plant shutdown is looming, several players say. The base oils industry has steadily moved to higher quality and more competitive group II/III refineries.

But despite growing concerns over the future of Group I base oils capacity, some plants in North America will remain open due to a need to maintain production of certain grades and by-products, said Terry Hoffman, director of base and process oils sales for Valero. He made his comments at a recent conference.

While technical demand for motor oils is increasingly requiring higher specification oils such as Group II+ and Group III, Hoffman stressed that industrial lubricants, which do not require these higher specifications, still account for 50% of demand.

Meanwhile, Group I plants also have the advantage of having the ability to produce heavier grades such as brightstock and by-product wax.

However, Hoffman added that while these factors would continue to promote demand for Group I production, base oil plant closures are often based on wider refinery economics.

As the market moves into 2010, the industry can only hold their breath, ever mindful that while demand may be growing, the supply balance remains fragile to say the least.

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By: Heather McGuire Doyle
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