ILMA Compoundings - June 2021 - 16

Market Report
U.S. Base Oil Prices Rise Through First
Half of 2021
By Guo Harn Hong
U.S. base oil prices have extended their rise in the first
half of 2021, supported by firm demand and tight supply
availability. Firmer crude and feedstock values provided
further price support. Prices have extended their rise
well into the second quarter of the year because of unexpectedly
tight supply.
Disruptions caused by an unprecedented arctic storm
in mid-February coincided with a heavy round of planned
maintenance and exacerbated the supply tightness. A swath of
paraffinic and naphthenic refineries was affected by the storm,
which also extended the planned maintenance.
Several refineries restarted most of their idled units in March,
and several of those refineries continued to run at reduced
rates through April amid continuing repair work. Producers
prioritized backfilling orders from their contract customers.
Several more refineries had planned maintenance in the
second quarter. Producers' inventories were more limited than
usual during and following these extended shutdowns.
Tight supply fundamentals triggered a round of unusually
frequent price increases in the first several months of
the year. Posted prices were raised monthly from January
through April.
The moves prompted buyers to seek supplies from other
producers. But those producers also had limited inventories
ARGUS DOMESTIC SPOT US GROUP II N100 VS 4-WEEK AVERAGE DIESEL
PRICES ($/USG)
$2.00
$1.90
$1.80
$1.70
$1.60
$1.50
$1.40
$1.30
$1.20
$1.10
$1.00
$0.90
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$ -
$(0.10)
May
2015
Nov
2015
May
2016
Nov
2016
May
2017
Nov
2017
May
2018
Nov
2018
May
2019
Nov
2019
May
2020
Nov
2020
May
2021
because of upcoming maintenance and reduced run rates.
Supply from overseas markets is also tight.
Blenders typically increase their procurement activities
from the second half of February as they prepare for the
spring oil-change season. The rise in demand typically
supports firmer prices. This time around, the lack of spot
supplies had a larger price impact than a rise in demand.
SUPPLY TIGHTNESS CURBS OVERSEAS SHIPMENT
Supply tightness is curbing availability for overseas markets
and generating unusual responses.
Regional demand remains firm in markets like Latin
America. The lack of surplus U.S. supplies and the difficulty
for some lubricant blenders to pass on higher raw materials
costs are prompting some to instead sell base oils from their
inventories. Some blenders are seeking to procure finished
lubricants, rather than base oils or additives, to cover their
commitments, and some have curbed or stopped their
lubricant production.
The tightness in the U.S. is boosting interest among
Latin American buyers in supplies from other regions like
northeast Asia, the Mediterranean and Russia. Buyers' rising
bids for those supplies are in turn exacerbating the tightness
in those markets.
Supply availability is expected to remain limited at least until
midyear. Unexpected and scheduled maintenance in the U.S.
and overseas markets will limit any rise in surplus supply.
U.S. refinery run rates have improved amid a rebound
in motor fuel margins relative to crude oil, but many refiners
have maintained run rates at lower levels in a bid to curb
fuel inventories.
The growing rollout of COVID-19 vaccinations has raised
expectations of a rise in fuels demand. U.S. diesel prices recovered
to pre-COVID-19 levels in mid-March. While prices have
ebbed since then, they remain at their highest since early 2020.
Even so, base oil values have far outpaced that rise in fuel prices.
BASE OILS PREMIUM OVER COMPETING FUELS RISES
TO RECORD HIGH
API Group I and Group II light grade base oils' premium
over competing fuels prices rose to the highest levels since at
least 2010.
16
JUNE 2021 | COMPOUNDINGS | ILMA.ORG
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ILMA Compoundings - June 2021

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