ILMA Compoundings - June 2021 - 17

ARGUS DOMESTIC SPOT US GROUP II N600 MINUS N100 ($/USG)
The trend highlights the different supply-demand fundamentals
that continue to impact base oils and competing
fuels. Demand for fuels weakened and inventories rose as
air and land transportation slowed. Refinery run rates fell in
response. In America and overseas, lubricants and base oils
demand have recovered much faster than fuels demand. But
there has been scant supply response.
Base oils account for only a small portion of refiners'
production. Surging base oil margins have been insufficient
for many refiners to raise run rates just to boost base oils
production. The result has been a continuing shortage of
feedstock for base oils production.
The trend, along with the heavy round of plant shutdowns,
is set to support even higher base oils margins at
least until midyear. Supply is then likely to get a boost
following the completion of a swath of regional and
overseas planned maintenance. Feedstock supply for base
oils production is also likely to increase on the back of an
expected rise in diesel prices and demand as more COVID19
vaccinations are rolled out.
But the size of a correction in prices and margins is likely
to be muted as a recovery in supply takes time to catch up
to and cover demand requirements.
HEAVY-GRADE PRICES REMAIN STRONG
Conditions support a strengthening of U.S. Group I and
Group II prices through the summer months. Some grades
are likely to rise more than others.
Domestic heavy-grade base oils have extended their rise
relative to grades with a lower viscosity. The premium of U.S.
domestic Group II Neutral 600 over Group II N100 rose in
March to the highest level since the third quarter of 2017, after
Hurricane Harvey struck southeast Texas. The Category 5 hurricane
knocked out two of the largest U.S. Gulf Coast refineries
from the end of August 2017 through early January 2018.
The rise in domestic heavy-grade values reflects their
firmer fundamentals relative to light grades. Even so, the
size of the rise in the heavy-grade premium to light grades
in the U.S. trails the size of the heavy to light price spread
in Asia-Pacific. In that market, the heavy-grade premium to
light grades has risen to record-high levels.
Recent, current and upcoming maintenance work has
tightened supplies of Group I and Group II heavy neutrals.
Overseas demand has remained strong.
At the same time, weaker-than-usual light-grade prices partly
reflect the closure of some outlets for these supplies. Lightgrade
supplies had been used as a fuel extender in some regions,
when diesel prices were relatively high and base oil prices
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relatively low. That price dynamic has now flipped the other
way, dampening the attraction of base oils as a fuel extender.
U.S. shipments to Latin American markets like Mexico
have slowed. That region had accounted for roughly a
fifth of total U.S. base oil production and a third of total
U.S. base oil exports prior to the onset of the COVID-19
pandemic. A large share of the shipments had been lightgrade
base oils.
There is a growing incentive for refiners to produce more
heavy-grade base oils, if they have the capacity to do so. An
expected rise in diesel values from midyear is also expected
to revive light-grade demand from other regional markets.
The heavy-grade premium over light grades is expected to
remain much firmer than usual amid expectations of stronger
fundamentals for heavy grades relative to light grades.
GROUP III PRICES FIRM
Domestic Group III 4 centistoke prices have maintained their
strength relative to domestic Group II N100 supplies. The
trend reflects limited availability of Group III supplies and
less-supportive fundamentals for Group II light-grade supplies.
Group III 4 cst prices are forecast to remain unusually
firm relative to diesel through early 2022. But they are
expected to weaken relative to domestic Group II N100
prices. Group III supply is likely to rise from mid-year following
the completion of planned maintenance in Europe
and Asia-Pacific and as refinery run rates rise.
Additional production capacity is also set to come online
in China in the coming months, continuing a swath of
new capacity of premium-grade base oils that has come on
line in that market since 2018. Even so, the country has
remained reliant on imports of Group III base oils to cover
OEM formulation requirements.
Weaker-than-usual Group II prices relative to Group III
also incentivize blenders to use more Group II light grades if
they can to produce certain lubricants. Blenders would also
be incentivized to use more Group II if the cost of additives is
lower than the price premium for using Group III base oils.
Hong is senior analyst of Argus Base Oils Outlook.
He may be reached at +65-6496-9811 or
guoharn.hong@argusmedia.com.
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ILMA Compoundings - June 2021

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