Crude oil slow to support US base oil increases

HOUSTON (ICIS)–Crude oil prices have been slow to support US base oil prices during July, despite snug supply in some viscosity grades and good demand factors provided by the summer uptick in driving and use of motor oils.

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One US base oil posted price increase emerged in July. Group II producer Chevron announced a 20 cent/gal increase on all its viscosity grades effective 2 July.

Crude oil prices jumped into the high $50 to low $60/bbl mark at early July, prompting the move by this key Group II US Gulf coast producer.

Other Group II producers have not, to date, made increase announcements. With Group II producers slow to move prices up, the price position for Group II base stocks is steady at the end of July but uncertain heading toward August.

One reason for this is the moderated performance of crude oil prices, hanging for most of July in the mid-$50s/bbl and failing to offer a significant support platform for base oil increases.

The following graph shows West Texas Intermediate (WTI) and Louisiana Light Sweet (LLS) crude oil price direction compared with Chevron’s Group II 200/220 viscosity posted price after the July increase.

In Q2 2019, base oil posted increases dominated April and May, although these were driven largely by higher vacuum gas oil (VGO) costs in addition to rising crude oil prices. VGO costs rose steadily and thinned out margins refreshed late in the first quarter following base oil price reductions during the second half of 2018.

Nearing the end of July, the US domestic base oil market is steady amid pockets of snug supply and experiencing good demand.

While these factors are maintaining a stable domestic market for base oils, none is sufficiently strong to counterbalance the tepid crude oil prices and offer an immediate platform for price changes.

There is another factor gaining interest in the base oil sector and that is the price of ultra-low sulphur diesel (ULSD).

One reason for this is that production choices for base oils are made at a refinery level and potentially more favourable margin factors for diesel can sway the choices toward more output of that product and less of the base oils.

The crude oil factor is not just a matter of immediate pricing. During the first quarter the effects of an industry need for heavier crudes bumped into a narrowing supply of these due to various issues including output cuts by OPEC nations and US sanctions on Venezuela.

With the US producing an abundance of lighter grade crudes, prices of medium and heavier grade crudes with higher sulphur content have increased.

Heavier, sour crudes produce more middle distillates in the refined products area. Shale oils typically yield lighter crudes, shortening the yields for middle distillate runs.

This is an evolving condition in the crude oil side, but is having some effect in base oils as the industry is carefully gauging the likely impact of the January 2020 International Marine Organisation (IMO) changes in sulphur content to be allowed for deep-water marine fuels.

Given these uncertainties, the crude oil influence on third-quarter base stock prices remains a key factor.

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Focus article by Judith Taylor