ILMA Compoundings - October 2020 - 20

INDUSTRY RUNDOWN

Market Report
Firm Overseas Demand to Boost U.S. Base
Oils Prices
By Guo Harn (Marc) Hong
U.S. base oil prices are forecast to edge upward over
the coming months amid firmer overseas demand that
helps to keep supply more balanced. Prices are then
set to face downward pressure in the fourth quarter of
2020 as supply availability rises and domestic demand
ebbs. The extent of that price pressure is likely to be
smaller than usual as overseas demand remains firmer
than usual.
Stronger demand from overseas markets like India, West
Africa and Latin America provided growing support to base
oil prices in the third quarter. Prices also received support
from firmer feedstock prices. These factors countered weaker-than-usual domestic demand and left supply relatively
balanced in August. Supplies, especially of Group II base
oils, got tighter after Hurricane Laura struck southwest Louisiana in late August. The storm caused widespread power
outages that stopped premium-grade base oils production at
a couple of U.S. Gulf Coast refineries for three to six weeks.
Buyers had mixed expectations on prices going into the
fourth quarter. Some blenders moved to secure supplies in
August amid expectations of higher prices. Other buyers held
back from such moves amid expectations that prices will edge
lower in the fourth quarter. Their uncertainty reflects weaker
demand amid the continuing COVID-19 outbreak.
Producers' expectations are also mixed. Most producers
raised their posted prices in August and September. But
there is uncertainty about whether the price increase will
stick in the fourth quarter, when demand is typically slower.
CRUDE, PRODUCTS PRICES TO EXTEND RISE IN 2021
While base oil supply-demand fundamentals remain uncertain, there are more widespread expectations that crude and
refined product prices will extend their rise through August
2021. The trend is expected to provide additional support to
base oil prices.
Relatively low crude prices and refined product prices
typically boost the attractiveness of producing more base

20

OCTOBER 2020

| COMPOUNDINGS | ILMA.ORG

oils. But weak refinery economics have prompted refiners to
maintain lower utilization rates. The trend has impacted the
availability of feedstock to produce base oils and has capped
any expected rise in base oil production.
A projected rise in feedstock and competing fuel prices
should limit any downward pressure on base oil prices,
especially when fundamentals are firm. Rising crude values
increase the cost of producing base oils. Rising competing
fuel prices like gasoil and diesel typically increase the opportunity cost of producing base oils.
This time around, a rise in competing fuel prices relative to
crude oil from unusually low levels would incentivize refiners
to boost run rates. The move would increase feedstock supply
for base oils and the capacity for refiners to raise output.
Prices for the lubricant feedstock are then forecast to rise
from early 2021 on the back of firmer seasonal demand and
rising feedstock levels as the market reverts to more typically
seasonal supply-demand patterns. The COVID-19 outbreak
distorted typical price and supply-demand trends in 2020 and
masked the price impact of new regulations that were implemented during the year. A reversion to more typical trends in
2021 is likely to increase the impact of those regulations.
IMO 2020 came into effect in January this year. The first
license date of the new ILSAC GF-6 engine oil specifications was in May. These regulations were expected to boost
demand for light- and premium-grade base oils because of
their better suitability to meet the more stringent standards.
Light- and premium-grade base oils are also closer substitutes for alternative fuels like diesel. They can be used in
applications such as as a fuel extender.
While the price impact from regulatory changes will likely
be reflected more in 2021, rising supply availability would
counter the extent of any price increase.
An unknown factor over the coming year is the possibility
of plant closures in other regions. Demand has already risen
in some of those regions in response to a sustained fall in
supply. Any permanent closure of base oil capacity would
prompt buyers in those markets to seek even more supplies
from sources like the U.S.


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ILMA Compoundings - October 2020

Table of Contents for the Digital Edition of ILMA Compoundings - October 2020

ILMA Compoundings - October 2020 - Cover1
ILMA Compoundings - October 2020 - Cover2
ILMA Compoundings - October 2020 - 1
ILMA Compoundings - October 2020 - 2
ILMA Compoundings - October 2020 - 3
ILMA Compoundings - October 2020 - 4
ILMA Compoundings - October 2020 - 5
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ILMA Compoundings - October 2020 - 7
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ILMA Compoundings - October 2020 - 11
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ILMA Compoundings - October 2020 - 17
ILMA Compoundings - October 2020 - 18
ILMA Compoundings - October 2020 - 19
ILMA Compoundings - October 2020 - 20
ILMA Compoundings - October 2020 - 21
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