OUTLOOK ’13: US base oils must contend with growing supply

02 January 2013 15:00  [Source: ICIS news]

HOUSTON (ICIS)--US base oils will have to contend with growing supply in 2013, as increasing production capacity and expectations for ongoing flat global economics appear poised to continue the price squeeze that emerged in the latter months of 2012.

In the US, Chevron’s 25,000 bbl/day Group II plant at Pascagoula, Mississippi, is scheduled to move into production during the fourth quarter of 2013.

Global capacity additions in 2012 included SK-JX Nippon Oil’s Ulsan, South Korea, facility at 10,000 bbl/day of new Group III output and S-Oil’s Onsan, South Korea, 3,000 bbl/day expansion of Group II/III material.

There are also capacity increases in the US re-refining sector, now able to produce Group II stock.

Re-refining companies are forging new routes to meet the increasingly stringent environmental and performance mandates in step with criteria specified by the American Petroleum Institute (API) for virgin base stocks.

According to industry analysts Kline & Company, tabulations put 2012 North American re-refining capacity at slightly under 800,000 tonnes, spread between locations in the US and Canada.

By 2017, if capacities expected to come on stream do so, North America’s re-refining capacity is expected to slightly exceed 1m tonnes.

Such significant capacity increases were already impacting the market at the end of 2012 and are expected to continue to do so in 2013.

Spurred by oversupply in Asia and Europe as well as full inventories in the US, steep November price reductions were taken by the Group II and III base oil tiers. These base oil tiers moved prices down by 25-48 cents/gal in November, depending upon the viscosity grade and producer.

Encouraged by the price gap between Group II and Group I, Group I producers decreased posted prices in November by 20-21 cents/gal, depending upon the viscosity grade, and dropped again in December by 16-28 cents/gal, depending upon grade and producer. 

Group I paraffinic brightstock posted prices were at $4.90-4.70/gal, depending upon the supplier, in October, moving down to $4.42-4.21/gal by mid-December, depending upon the supplier. 

US naphthenic base oil prices also fell, with late November price drops of 20-21 cents/gal announced by most naphthenic suppliers.

Growing supply joined to flat demand to form primary drivers pushing the deep Group II and III reductions.

Falling prices in Asia and Europe also threatened to offer buyers in the Americas expanded options for imports.

Suppliers and buyers acknowledged that the US fourth-quarter price reductions were sparked in an effort to narrow arbitrage windows.

In December US buyers continued to shy from imports because of ongoing price uncertainty in the other regions as well as readily available domestic supply.

But going into 2013, there are signs that the base oils market is changing and US base oil participants can find support to contend with the growth in supply.

US domestic demand held a steady pace in November and December, albeit at seasonal lows exacerbated by a still unimpressive economic scenario.

Hopes for improvement in the first quarter of 2013 reside mostly in North and South American business.

For North America, base oil buyers say expectations are that demand from the factory-fill end-use segment will increase not only on the seasonal uptick, but also on overall improvement in vehicle production and sales.

Relevant to the North American market, Mexico’s consumption of Group II base oils is growing, offering fresh off take points for new streams of US production.

While it is evident that US base oils buyers and sellers will have to contend with growing supply, the regional needs of the NAFTA (North American Free Trade Agreement) countries (US, Canada, Mexico) seem poised to undergo shifts that may well counter supply growth, to some extent.  

Balanced fundamentals are not anticipated in 2013, but the industry is working to find routes to cope with such capacity growth amid shifting market and regulatory needs.

 

 

 

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By: Judith Taylor
+1 713 525 2653



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