ILMA Compoundings - March 2021 - 13

FIRM FUNDAMENTALS SUPPORT US BASE OIL MARGINS
700
600

Dom SN 150 - diesel
Dom BS - diesel
Dom N220 - diesel
Dom 4cst - diesel

Dom SN 500 - diesel
Dom N100 - diesel
Dom N600 - diesel

500

$/t

400
300
200

Higher crude values put pressure on base oil margins. But
firm fundamentals gave producers the leverage to raise their
prices in response that squeeze on margins. They implemented another round of producer posted price increases in
the second half of January.
Firm supply and demand fundamentals will likely limit
the size of any price drop from the second quarter of the
year. Domestic and overseas consumption are likely to get a
boost as lockdown measures are eased and economic activity
revives. Maintenance work in the U.S. and in overseas
markets will continue to impact supply.
EXPORT PRICES RISE TO PREMIUM TO DOMESTIC
PRICES
Most domestic Group I and Group II base oil grades are
currently at a discount to export values except for bright
stock. The bright stock domestic price premium of $6/t is
the lowest since early 2010.
The trend reflects firmer fundamentals in export markets,
where refinery turnarounds and run cuts have tightened
spot availability. Demand is also recovering at a faster pace
in other regions like Asia-Pacific, where the spread of the
COVID-19 virus is under more control.
Domestic prices are likely to strengthen relative to export
values as demand revives. Domestic supply is also likely to
remain relatively tight, even if refiners raise their run rates
in response to firmer demand and fuel margins. Strong
demand from overseas markets provides them with a ready
outlet for their surplus base oils.
Domestic prices have been at a discount to export prices
since the second quarter of 2020. The last time that happened
was in 2011. The premium of domestic Group I prices over
export prices has averaged $71/t since 2011. For Group II
base oils, the domestic price premium has been $48/t.
Domestic Group I and Group II prices are forecast
to revert to a premium to export prices in the second
quarter. The average Group I domestic premium is then

100
0
2018

2019

2020

2021

2022

-100

forecast to rise to around $45/t by the end of the forecast
horizon. Domestic Group II prices are forecast to adjust
to a $33/t premium over export prices by the end of the
forecast period.
GROUP III PRICES TO HOLD FIRM AMID TIGHT SUPPLY
Domestic U.S. Group III 4cst prices trended higher in January amid balanced-to-tight supply. Throughout the second
half of 2020, their price premium to domestic Group II
N100 has held at its highest level since 2017. That price
strength is extending into the first few months of 2021.
Group III prices got support from reduced shipments from
key sources like Asia-Pacific. Upcoming plant maintenance
work in other regions is set to keep supply tight over the coming months. Rising demand for Group III base oils in other
markets is adding to competition for the tight supplies.
Group III prices are forecast to remain firm versus Group
II base oils in the following months. But their premium to
Group II is set to ease later in the year. The trend reflects a
gradual recovery in Group III supply availability and firmer
fundamentals for domestic Group II prices. Maintenance
work on several Group III plants in Europe is expected to be
completed by the end of the first half of this year.
Group III 4cst price premium to domestic Group II
N100 prices has averaged $238/t since 2018. The current
premium is around $324/t. The premium is forecast to slip
back to an average of $268/t during the forecast horizon.
Hong is senior analyst of Argus Base Oils Outlook.
He may be reached at +65-6496-9811 or
guoharn.hong@argusmedia.com.

13



ILMA Compoundings - March 2021

Table of Contents for the Digital Edition of ILMA Compoundings - March 2021

ILMA Compoundings - March 2021 - Cover1
ILMA Compoundings - March 2021 - Cover2
ILMA Compoundings - March 2021 - 1
ILMA Compoundings - March 2021 - 2
ILMA Compoundings - March 2021 - 3
ILMA Compoundings - March 2021 - 4
ILMA Compoundings - March 2021 - 5
ILMA Compoundings - March 2021 - 6
ILMA Compoundings - March 2021 - 7
ILMA Compoundings - March 2021 - 8
ILMA Compoundings - March 2021 - 9
ILMA Compoundings - March 2021 - 10
ILMA Compoundings - March 2021 - 11
ILMA Compoundings - March 2021 - 12
ILMA Compoundings - March 2021 - 13
ILMA Compoundings - March 2021 - 14
ILMA Compoundings - March 2021 - D1
ILMA Compoundings - March 2021 - D2
ILMA Compoundings - March 2021 - D3
ILMA Compoundings - March 2021 - D4
ILMA Compoundings - March 2021 - D5
ILMA Compoundings - March 2021 - D6
ILMA Compoundings - March 2021 - D7
ILMA Compoundings - March 2021 - D8
ILMA Compoundings - March 2021 - D9
ILMA Compoundings - March 2021 - D10
ILMA Compoundings - March 2021 - D11
ILMA Compoundings - March 2021 - D12
ILMA Compoundings - March 2021 - D13
ILMA Compoundings - March 2021 - D14
ILMA Compoundings - March 2021 - D15
ILMA Compoundings - March 2021 - D16
ILMA Compoundings - March 2021 - D17
ILMA Compoundings - March 2021 - D18
ILMA Compoundings - March 2021 - 16
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