INDUSTRY RUNDOWN Market Report U.S. Base Oil Prices Forecast to Firm in Q3 By Guo Harn (Marc) Hong U.S. base oil prices are forecast to trend upward in the months ahead amid a revival in lubricant demand as market activity increases. A projected rise in crude and refined products prices is expected to provide additional price support. These factors should outweigh the price pressure from an expected rise in production in the third quarter. Prices are then projected to trend downward in the fourth quarter of the year as supply availability rises further and demand slows. Producers and blenders typically hold additional stocks in the third quarter to cover for any possible weather-related disruptions during the Atlantic hurricane season. Producers then release those stocks in the fourth quarter in the absence of any such disruptions over the coming months. But firmer fundamentals should support prices at least over the next few months. The lifting of COVID-19 restrictions in June triggered a pickup in transportation, logistic and manufacturing activities, along with demand for the lubricants required for these activities to run smoothly. The stronger demand has supported a sharp pickup in base oil values in June across most grades and for Group II base oils especially. Expectations that base oil prices had bottomed out in late June provided additional support. More buyers were increasingly comfortable to resume purchases to secure supplies before prices increased. The pickup in demand helped reduced the size of their surplus. Producers relied on export markets like Mideast Gulf and West Africa to clear a large volume of surplus supplies in May and June. Many producers also cut production run rates from late March, even when base oil margins appeared to be unusually strong compared with crude oil prices. With inventories more balanced, many producers have reduced or removed temporary discounts on base oils. They also raised their posted prices between 15 and 16 cents per gallon at the end of June for the first time since January. 18 AUGUST 2020 | COMPOUNDINGS | ILMA.ORG SUPPLY REMAINS KEY PRICE DETERMINANT Supply fundamentals are likely to remain the key determinant behind the strength and sustainability of the expected rise in base oil prices in the months ahead. Any measures that limit base oil or refinery run rates will impact the size of the expected price rise. According to Argus' proprietary base oil supply index, U.S. net nameplate base oil production for the month of July is set to rise by close to 2% compared with June. The supply index measures the average net daily nameplate production capacity for the month. While production edges higher in July, it is set to remain lower than average levels in the fourth quarter of 2019 and in January this year. The lower output partly reflects U.S. refiners' unusually low run rates in response to oversupply of and weak prices for motor fuels like gasoline and diesel. BASE OILS PRICES WEAKEN VERSUS CRUDE Base oil production is set to revert to those earlier production levels from August 2020. But this could change if U.S. refinery run rates fail to rise from current levels. An increase in production would counter upward price support from a combination of firmer demand and rising crude prices. Base oil values relative to crude - the pricestrength ratio - fell to its lowest level of the year in June. The average price-strength ratio for all grades has dropped to 1.61. The ratio is down by 8% from May and by more than 50% from April. The price-strength ratio faces even more pressure amid expectations that crude prices will rise even further. According to Argus' Crude and Refined Products Outlook, crude prices have got support from a combination of easing country lockdowns and the subsequent demand recovery. Prices received additional support from a sharp fall in high-cost non-OPEC crude output, and sharply lower Opec+ crude production from May. If OPEC+ pursues the current level of scheduled cuts through 2021, a significant supply shortfall is expected. Light Louisiana sweet crude prices are forecast to rise by more than 20% from current levels by June 2021.http://www.ILMA.ORG