OUTLOOK ’19: Crude oil/MARPOL stir uneasy waves for Americas base oils

HOUSTON (ICIS)–Going into 2019, two items are stirring uneasy waves for the Americas base oil market: crude oil prices and the MARPOL (International Convention for the Prevention of Pollution from Ships) initiatives under the IMO (International Marine Organization) on new sulphur content guidelines for marine fuels.

A consequence of crude oil prices staying in the $50s/bbl along with deliberations within OPEC and the global oil-producing regions is above-average uncertainty about crude oil prices going into 2019. Those uncertainties are keeping a crunch on base oil prices that is unlikely to abate in the first quarter of the new year.

The following ICIS graph shows price direction for benchmark West Texas Intermediate (WTI) crude and for Louisiana Light Sweet (LLS) crude oil that closely mirrors Brent movements.

At the time of this writing, indications were that Saudi Arabia continues to work to convince Russia to take another round of supply cuts. Both countries hold different views about respective break-even costs. Iran appeared as a late-entry obstacle to any supply deal, as the sanction-hit country is claiming the right to an exemption because of its current circumstances. Additionally, the Saudi energy minister noted uncertainty that any deal can be concluded.

Part of the challenge facing base oil prices comes from the compression of the crude oil spike to about $75/bbl in October and the dive into the $50s/bbl across the span of the quarter.

In September/October when crude hit $75/bbl Americas base oil posted prices increased by about 25 cents/gal from most producers in each of the base oil groups.

By November/December, paraffinic posted prices had shed the 25 cents/gal and several producers, mostly Group I at the time of this writing, moved down another 15 cents/gal. The decreases were primarily driven by sinking crude oil prices that moved into the $50s/bbl and continued to bob around that mark.

These changes represented a 40 cent/gal reduction in base oil posted prices in less than three months.

With the coming holiday season keeping demand subdued, this put a bookend on the year with snarled crude oil prospects still hanging for the new year.

Naphthenic base oil prices were not immune to the effects of the crude oil plunge, snagged by lower prices in the paraffinic sector that encouraged buyers to expect lower prices in the pale oils as well, despite the fact that pale oils do not necessarily trend one-on-one with the paraffinics.

Driven by the crude oil dive and by seasonally slower demand in some of the viscosity grades, most naphthenic producers formally announced 20 cent/gal reductions on all viscosity grades with effective dates from late November to early December.

An exception is Cross Oil, which elected to reduce prices by 3-8% per gallon depending upon the viscosity grade, effective 10 December.

The second attention-grabbing item for base oils and industrial lubricants in 2019 will come into more focus as effects of the IMO initiative on sulphur content percent in marine fuels begin to emerge.

This initiative is set to become effective in 2020, making 2019 the year for examination of what changes can actually take place, how to put these into place and what enforcement will look like.

MARPOL is the main international convention aimed at preventing pollution from ships caused by operational or accidental issues. It was adopted at the IMO in 1973, with the Protocol of 1978 being adopted in response to a number of tanker accidents in that decade.

On 1 January  2020 new global rules from the IMO through MARPOL will take effect and shipowners must cut sulphur emissions from 3.5% to 0.5% or less.

A low-sulphur cap under the MARPOL rule has already applied to areas known as Emission Control Areas (ECAs) in North America, the Baltic region and the North Sea.

Group I base oils are a major component of marine lubricants and market players are watching the IMO situation closely in order to gauge the likely effect.

In the IMO view, responsibility for monitoring compliance lies with states that are party to MARPOL’s Annex VI, which is a section of the US Environmental Protection Agency (EPA). States within this relation are viewed by the IMO as responsible for any fines or sanctions for non-compliance.

One Group I base oil producer said, “It is still undecided, lots of questions.”

From an Americas base oil perspective, that comment closely sums up the market and industry stance entering 2019.

Focus article by Judith Taylor

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