ILMA Compoundings - May 2020 - 16

INDUSTRY RUNDOWN

Market Report
U.S. Base Oils Prices Face Pressure Amid
Virus Outbreak, Weak Crude Prices
By Guo Harn (Marc) Hong
U.S. base oil prices will face downward pressure from
weaker fundamentals and lower crude prices. These
factors will outweigh any price support arising from
lower refinery run rates or stricter marine and motor
fuel standards being implemented this year.
Base oils demand typically gets a seasonal boost in March
and April during the spring oil-change season. This year,
some of that buying took place earlier than usual after U.S.
producers raised their posted prices in January. Demand
then halted as the COVID-19 pandemic spread throughout
the country. The worsening coronavirus outbreak in the
U.S. and measures implemented to contain its spread have
slashed social, economic and industrial activity. The moves
have cut demand for transport fuels and lubricants used in
the machinery those fuels operate.
A slowdown in manufacturing and marine sector-related
activities will cut demand for Group I base oils used in
industrial and marine lubricants. A slowdown in commercial operations and transportation curbed demand for
Group II and Group III base oils in engine oils.

Argus domestic spot Group III 4cst minus Group II N100 ($/USG)
$1.40
$1.30
$1.20
$1.10
$1.00
$.90
$.80
$.70
$.60
$.50
$.40

Jan
2015

Aug
2015

16

Mar
2016

Oct
2016

May
2017

Dec
2017

Jul
2018

MAY 2020

| COMPOUNDINGS | ILMA.ORG

Oct
2017

Feb
2019

Apr
2020

The slump in crude and diesel values has added to the
downward pressure on base oil prices. The fall in global
crude prices gathered pace from early March following the
breakdown of the OPEC talks and subsequent moves by
major producers to raise crude output.
Weekly average prices for Light Louisiana Sweet crude fell
by more than 55% in March to their lowest since early 2002.
Buying interest decreased as economic activity slowed.
More buyers held back and secured fewer supplies. They
sought to stock up on higher-priced base oils. Many blenders chose to run down their inventories until they needed to
replenish supplies.
PRODUCERS' RESPONSE TO WEAKER
MARKET DYNAMICS
Producers quickly responded to the virus outbreak and
the drop in crude values and demand. Producers cut their
posted prices twice in March. The combined cuts ranged
between $0.70 and $1 per gallon, slashing the premium of
producer posted prices to Argus U.S. domestic spot prices.
Several refineries cut their crude production run rates
in March and April in order to curb their production of
gasoline. Some refineries also reduced production rates on
their base oils units.
It remains unclear to what extent U.S. base oils production
will be affected by any more widespread refinery run cuts.
Directives to contain the spread of the virus and slumping
oil product margins increase the prospect of run-cuts. These
would likely curb base oils production and supply.
Any such cut in production would help to sustain firm
base oil margins, which extended their surge in March,
peaking at their highest levels since 2012.
MEXICO SHUT AS KEY OUTLET FOR U.S. LIGHT GRADES
Even if supply falls, U.S. base oils prices are set to face
pressure from decreased demand from its key outlet for
surplus light-grade supplies. Demand from Mexico for lightgrade imports from the U.S. fell after diesel prices slumped


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ILMA Compoundings - May 2020

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ILMA Compoundings - May 2020 - 1
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ILMA Compoundings - May 2020 - 3
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