ILMA Compoundings - November/December 2020 - 14

INDUSTRY RUNDOWN

Market Report
U.S. Sees Firm Price Support Amid Tight
Markets, Impacts From Hurricanes and
COVID-19
By Amanda Hay
U.S. base oil markets were unusually tight heading
into the fourth quarter of 2020. Snug supply supported
firm pricing despite the slow recovery downstream as
COVID-19 continued 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 U.S.'s usually ample Group II supply position. Hurricanes
threatened three of the four major U.S. Group II base oil
suppliers, and anywhere from 15% to 41% of virgin production
capacity was offline from late August well into October.
The Group II shortage not only affected domestic customers, but it prevented the U.S. from satisfying robust overseas
demand that had accelerated in August.
Base oil supply fundamentals propped up pricing, with
support from firm costs for feedstock vacuum gas oil (VGO).
Pressure would persist until production constraints eased
and inventories could be built - counter to a typical fourth
quarter, where 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 have kept their rates reduced because of ongoing
weak demand for gasoline and diesel that led to oversupply.
The three-year median for U.S. refinery utilization is 90%,
according to the Energy Information Administration (EIA).
Since COVID-19, the highest it reached was 82%. The low
point was 67.7%.

NOVEMBER/DECEMBER 2020

| COMPOUNDINGS | ILMA.ORG

U.S. Group II Virgin Base Oil Refining Capacity

Excel Paralubes

Motiva

Rest of U.S.

Base oil units were estimated to be running at even lower
rates than this during the peak of the second-quarter downturn. Through July, U.S. net lubricant production was down
by 11% 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-19
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 U.S. 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

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ILMA Compoundings - November/December 2020

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