INSIGHT: US base oils prices rise as supply unusually tight on hurricanes, pandemic

Amanda Hay

20-Oct-2020

HOUSTON (ICIS)–US base oil markets are atypically tight heading into the fourth quarter.

Snug supply is supporting firm pricing despite the slow recovery downstream as coronavirus continues to weigh on the finished lubricants sector and overall economy.

The one-two punch of reduced refinery rates earlier in the year and an especially active Atlantic hurricane season dealt a blow to the US’ usually ample Group II supply position.

Hurricanes threatened three of the four major US Group II base oil suppliers, and anywhere from 15-41% of virgin production capacity was off line from late August through much of October.

The Group II shortage has not only affected domestic customers, but it has prevented the US from satisfying robust overseas demand that accelerated in August.

Supply fundamentals have propped up pricing, with support from firm costs for feedstock VGO.

Pressure is expected to persist until production constraints ease and inventories are built — counter to a typical fourth quarter in which producers would be clearing surplus supplies into the market.

REDUCED PRODUCTION AFFECTS SUPPLY LEVELS
Demand picked up in late June as manufacturing activity resumed, spurring buying appetite for finished lubricants. Supplies dwindled as that happened and as producers moved material into export markets.

Supply was sufficient to meet needs, but it was reduced from normal levels.

This was partially driven by the fact that refiners kept their rates reduced because of ongoing weak demand for gasoline and diesel that led to oversupply.

The three-year median for US refinery utilisation is 90%, according to the Energy Information Administration (EIA).

Since COVID-19, the highest it reached was 82%. The low point was 67.7%.

Base oil units were estimated to be running at even lower rates than this during the peak of the Q2 downturn.

Through July, US paraffinic net lubricant production was down by 13% compared with the same period in 2019, according to the EIA.

May was the low point. Production was down by 25% compared to the average of the previous four years for that month.

Rates began to improve from there, with July output up 19% over May. Still, July production was down by 14% year on year.

Gasoline consumption never returned to pre-COVID levels with virus restrictions lingering well past original estimates, and the winter season typically sees lower demand.

For both refinery output and base oil production, an especially active Atlantic hurricane season compounded the problem.

Hurricane Laura shut 41% of US Group II virgin refining capacity as both Motiva (38,300 bbl/day) and Phillips 66’s Excel Paralubes (22,200 bbl/day) shut ahead of the storm, according to the ICIS Supply and Demand Database.

Laura devastated the Lake Charles, Louisiana, area and the power grid required nearly a complete rebuild.

Motiva was able to restart soon after Laura passed, but Excel Paralubes was more directly in the path and remained off line well into October. It accounts for 15% of US capacity.

Phillips 66 received power by early October, but Hurricane Delta delayed the restart timeline for its Lake Charles refining complex as the storm took nearly the same path as Laura.

Excel’s outage and ongoing reduced rates by other refiners kept the US very tight. Base oil producers are focused on supplying their domestic contract customers. Spot availability quickly dried up.

Supply is tighter for N220 and N600 compared with N100.

It is not likely that US suppliers will much surplus until the first quarter of 2021.

PRICES FIRM ON TIGHT SUPPLY, IMPROVING DEMAND
Tight supply prompted a round of posted price increases ranging 15-30 cents/gal from mid-September to early October.

Buyers looked to secure additional volumes from alternative suppliers with Excel shut, but producers had a difficult time meeting the increased demand.

With suppliers focused on honoring their contracts and any agreements in place prior to Hurricane Laura, spot activity is largely muted. If it can be found, it is at a premium.

Downstream demand is strong ahead of finished lubricants price increases.

STRONG OVERSEAS DEMAND LIFTS EXPORT PRICES
Hurricane-related supply tightness also means the US was no longer in a position to satisfy growing demand from overseas markets, particularly India and Brazil.

August export volumes were at a three-year high for the month despite ongoing recovery from coronavirus on the finished goods side, according to the ICIS database.

Volumes to India skyrocketed year on year in August and more than doubled July’s volumes. Year to date, volumes to India are up by 41% compared with 2019.

Supply was tight in India, with limited availability from Asia or the Middle East, so buyers looked to the US despite the higher freight rates it would take to get material.

Volumes to Brazil were 64% higher year on year in August and 53% higher month on month. Volumes to Brazil were down sharply during the Q2 lockdown period, so year-to-date exports are down by 25%.

Local Brazilian supply has been limited since June, driving an increase in demand for US material.

Strong overseas demand lifted Group II export prices in line with domestic pricing, whereas it typically runs at a 20-30 cent/gal discount, before the hurricane.

Post-Laura spot export prices firmed to premiums over contract although little material was available.

The premium to feedstock VGO widened significantly.

FEEDSTOCK COSTS FIRM, SUPPLY SNUG
Feedstock VGO was also snug because of reduced refinery rates, which was compounded due to hurricane-related closures of several US Gulf Coast refineries including Phillips 66 in both Lake Charles and Belle Chasse, Louisiana, and CITGO in Lake Charles.

Belle Chasse was shut ahead of Hurricane Sally, but remained down and began planned maintenance early.

Tighter supply caused VGO to strengthen relative to crude around late September. VGO had already been on a firm upward trend for two months prior to Laura.

While costs were firm, base oil price increases outpaced VGO increases so margins were good on paper—though suppliers likely did not have material to sell.

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

Insight article by Amanda Hay

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