INDUSTRY RUNDOWN Market Report Higher Crude Prices Support Firmer U.S. Base Oils Prices By Eva Molina U.S. base oils prices firmed in May as crude prices rose to their highest levels since late 2014. Producers raised their posted prices in May for all base oils groups and viscosities for the third time this year despite weaker supply-demand fundamentals, especially for Group II heavy grades. Spot prices for Group II and Group I light and heavy grades had started to fall in April amid increased surplus supplies of mostly Group II mid- and heavy-viscosity base oils. Producers had less leverage to raise their prices in response to rising feedstock prices in April because of more plentiful supplies than usual. But growing pressure on base oil margins prompted all producers to raise their posted prices for a third time this year between late April and late May. Even with those posted price increases from late April, spot prices held steady or increased only slightly. The third round of posted price increases ranged between 12 and 21 cents per gallon. These price increases followed the surge in crude prices in early May to a 3½-year high. Crude oil prices in late May had increased between 19 and 23 cents per gallon from mid-February, when producers last raised their posted prices. Low-sulfur vacuum gasoil (VGO) prices had increased by 13 cents per gallon during the same period. DOMESTIC DEMAND REMAINS WEAK Group II mid- and heavy-viscosity supplies have been more plentiful since March. Availability of all grades is typically tighter just before and during spring because of a seasonal rise in demand that coincides with lower supplies because of maintenance. But the usual pickup in seasonal demand in the domestic U.S. market in March and April was weaker this year compared with previous years. Overall domestic base oils demand in 2018 has continued to trend below the five-year seasonal average. 18 JULY 2018 | COMPOUNDINGS | ILMA.ORG Some producers reported steady domestic demand from the end of 2017 and through the second quarter of 2018, but most producers have reported flat demand or a weaker increase in demand during the spring months. PRODUCTION RISES AMID LIGHT MAINTENANCE While domestic demand has continued to decline, U.S. base oils production has increased amid a lighter round of virgin base oil refinery maintenance this spring compared with last year. Several of the major U.S. Gulf Coast refineries had planned maintenance on crude units in April and May. This planned maintenance had little to no impact on base oils or on curbing the surplus overhang of Group II heavy grades. A couple of Group II refineries have made improvements to their refining processes. This has boosted overall base oils production and N600 output in particular. The surplus overhang of N600 has squeezed margins for the heavy-grade base stock. The Argus domestic spot Group II N600 premium to four-week average low-sulfur VGO prices fell in mid-May 2018 to 80 cents per gallon, its lowest level since late May 2015. It was also down from a premium of $1.49 per gallon in mid-May 2017. LIGHT-GRADE SUPPLIES REMAIN LIMITED The surplus of heavy grades contrasted with more balanced availability of paraffinic light-viscosity grades. There is increasing demand for light-viscosity base oils to manufacture low-viscosity lubricants. At the same time, planned and unplanned maintenance at several re-refineries in the first and second quarters of the year curbed Group II light-grade production and availability. Decreased production of Group II light grades at a major U.S. Gulf Coast refinery also trimmed light-grade availability. Another major U.S. Gulf Coast refinery recently tweaked its refining process to improve some of the specifications of its Group II N110 product. These improvements carry with them a yield-penalty that has curbed the producer'shttp://www.ILMA.ORG