ILMA Compoundings - March 2020 - 16
U.S. Supply and Demand, EU Import Quota
and IMO 2020
By Amanda Hay
U.S. base oil markets started 2020 facing upward price
pressure amid a firmer crude complex and expectations of tighter supply early in the year due to planned
Cost pressures that began to mount in December and
easing supply length prompted price increases ranging from
25 to 30 cents per gallon, mostly on API Group II but also
on some Groups I and III oils as of press time.
Motiva led the round of increases, raising its posted price
by 30 cents per gallon across all grades in Groups II and III.
Most other U.S. producers followed.
The increases were steeper than most market participants
would have expected, given that crude gains since early
December were largely erased by mid-January.
Moreover, supply views were mixed. Some players said
product remained available for contract customers, although
spot availability was tighter, and did not expect the market
to tighten much with turnarounds.
SUPPLY OUTPACES DEMAND IN LATE 2019
Conditions were a shift from the back half of 2019, which
was largely characterized by soft fundamentals.
With supply outpacing demand, two separate postedprice increases prompted by temporary crude spikes -
20 cents per gallon in July by Chevron and 12 cents per
gallon in September by ExxonMobil - ultimately did not
find support as crude futures quickly retreated.
Each increase was rescinded, and base oil posted prices
remained stable as the crude complex struggled to find
Market players were looking for a clearer cost trend, and
supply was readily available relative to steady-but-soft demand.
Most players started to anticipate a potential posted-price
reduction by early October as West Texas Intermediate
(WTI) crude futures had plunged to $52 per barrel and
Brent to $57 per barrel.
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Posted prices remained stable, however, on challenged
margins and little change in either direction in crude prices
through the fall.
Instead, domestic length was managed through temporary
value allowances (TVAs) for some customers and through
export markets, where prices were significantly pressured.
A feedstock cost uptrend started to emerge in early
December, and U.S. base oil supplies began to dwindle,
with TVAs disappearing.
Crude and vacuum gas oil (VGO) maintained upside bias
through the month and into 2020, especially as U.S.-Iran
tensions flared in early January and sent crude futures to
their highest point since attacks on Saudi Arabia oil infrastructure in September.
As quickly as crude soared, however, it plunged, underscoring global supply realities.
Motiva's announcement followed a crude-price retreat to
the lowest point in about a month. The complex finished
lower for several consecutive sessions, underpinned by backto-back U.S. crude stock and distillates builds.
The complex's retreat, paired with views that supply was
still sufficient to meet demand, led to some buyer pushback
on the increases.
EU IMPORT QUOTA WILL CHALLENGE US EXPORTS
Starting Jan. 1, a quota for duty-free Group II base oils went
into effect for imports into Europe, a key market for the U.S.
Under the quota, up to 200,000 metric tons of material
per six months would be exempt from tariff, and a 3.7%
duty would be applied on volumes surpassing that limit.
Material of a viscosity between 150N and 600N is included.
The challenge for U.S. producers will lie in the fact that
European demand for Group II material outpaces local
supply sources, and many market players view the volume
threshold as too low.
Some market players expect the 200,000-metric-ton threshold to be surpassed fairly quickly in each six-month period.
ILMA Compoundings - March 2020
Table of Contents for the Digital Edition of ILMA Compoundings - March 2020
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