US base oil markets face firm costs; export demand expected strong into ’20

HOUSTON (ICIS)–Heading into January, US base oil markets face competing pressures of firm costs against continued oversupply, while export markets remain key for US suppliers in mitigating length.

Upstream strength offset base oil supply length in US markets as crude futures have exceeded $60/bbl on the back of trade optimism between the US and China and OPEC’s supply cut agreement.

Firm crude and vacuum gas oil (VGO) prices have kept posted prices and domestic market spreads largely steady over the last couple of months.

Rather, pressure has manifested itself through select temporary value allowances (TVAs) and in export markets rather than in changes to posted-price levels.

Margins continue to be pinched throughout the supply chain, and demand has been lacklustre from blenders.

Length is being managed through exports, although markets are competitive amid continued global oversupply.

Latin America drove export demand for the US in 2019, and that is expected to continue into 2020.

While total US exports are down by 1% through October, the latest month for which data are available, strong gains were recorded in volumes to Mexico and Brazil, both up by 27%, according to the ICIS Supply and Demand Database.

Mexico is the US’ top export destination, followed by Belgium and Brazil.

Export volumes to Mexico were up by double digits in each month of 2019—which is a combination of US supply length and strong demand in that country.

Demand from Mexico is strong for light-viscosity base oils for fuel-blending purposes, and markets are still active although they have slowed somewhat following an influx of product early in 2019.

Storage space will continue to be a challenge in Brownsville, Texas, where volumes to the hub outpace available tank space. Prices are competitive, but there is no room to store material.

This has kept pressure on Group II export prices.

With global oversupply of Group II, Mexico is likely to remain an outlet for producers until Pemex invests in refinery maintenance.

Export volumes to Belgium are also stronger year on year through October.

Despite Group II capacity coming online at ExxonMobil’s facility in Rotterdam, the region’s Group II demand outpaces local supply.

Looking ahead to 2020, a new EU import quota is scheduled for 1 January.

The EU would allow up to 400,000 tonnes/year (200,000 tonnes per six months) of Group II material to enter tariff free but volumes above that would be subject to a 3.7% tariff.

Base oils are used to produce finished lubes and greases for automobiles and other machinery.

Focus article by Amanda Hay