ILMA Compoundings - Jul/Aug 2021 - 14

Market Report
Pandemic Fallout: Supply, Price Panic Grip
U.S. Base Oil Markets in the First Half of 2021
By Amanda Hay
After enduring nearly a year of unrelenting price hikes
and supply disruptions, base oil consumers have one
question: When will it end?
Downstream, consumers struggle to manage a supply
drought that threatens to persist into 2022 after a buyer's
market characterized much of the last decade. Even base oil
producers are in the market and cannot secure what they
need. " Structurally, the market has been so long; now it's
touch-and-go, " a market player said.
Prices surged globally during the first half of 2021, but
they began to stabilize in other regions while continuing to
climb in the U.S. Despite ever-higher pricing, demand has
been unyielding. " What we are doing is not sustainable, " a
market player said, yet imbalanced fundamentals appear
likely to last for several more months.
Q1 PRODUCTION, STOCKS AT MULTIYEAR LOWS
" It is that tight, " a market player emphasized, and the data
back that up. U.S. Energy Information Administration
(EIA) data show that refinery rates reached all-time lows in
February, when a deep freeze paralyzed Gulf Coast refining
capability. Roughly 42% of virgin base oil refining capacity
was offline, according to the ICIS Live Disruption Tracker.
EIA data also reveal that first-quarter lubricant output
was at its lowest since 2013, and lubricant monthly stocks
reached a five-year low. A full recovery to pre-pandemic
refining utilization is not expected until 2023, when jet fuel
consumption recovers.
Oil products consumption is rising with economic growth
and pent-up demand as pandemic restrictions ease and
consumers drive more. Both gasoline and diesel demand
have nearly fully recovered to pre-pandemic levels, but jet
fuel demand is still about 40% below pre-pandemic levels.
Until increased air travel spurs more jet fuel demand,
refinery crude runs will be capped. May 2021 crude runs
were still 1.1 million bbl/day below May 2019 levels. Part
14
JULY/AUGUST 2021 | COMPOUNDINGS | ILMA.ORG
of the reason base oils are so tight is that lubricant demand
had largely returned to pre-pandemic levels by the end of
summer 2020, but lower-than-normal crude runs capped
production as feedstock was unavailable.
TIGHT SUPPLIES DRIVE RECORD PRICE LEVELS,
DON'T DETER DEMAND
The supply/demand imbalance forced an unprecedented six
rounds of base oil posted price increases since December 2020.
U.S. suppliers simply cannot catch up to demand that
returned nearly a year ago, with supply levels increasingly depleting
over the last six months. Rising prices for feedstock VGO
added some support, but the primary driver has been tight
supply. As of June 23, most producers had raised their selling
prices seven times since December (eight including a partial
round of Group II+ and Group III increases in November).
Motiva moved six times.
Posted prices for bright stock and N600, the two tightest
grades, illustrate the historic nature of the last half-year.
ExxonMobil's bright stock price reached its highest point
on record at $7.31 per gallon on June 1, surpassing the
previous record of $5.82 per gallon set in summer 2008.
The ICIS N600 assessment has surpassed the Motiva
N600 posted price, which is typically the Gulf Coast low
price. " It's stone-cold panic, " one market player said of
persistent price increases.
U.S. prices continued to climb while stabilization
emerged in other regions. One reason is sustained production
constraints that are unique to the U.S. stemming from
the winter storm outages, prolonged maintenance, heavy
rains and, most recently, the fire at Ergon's paraffinic facility.
A second reason is that price uplift was quicker in other
regions, and the U.S. had not kept pace amid additional
disruptions in this region. " Every issue is magnified; every
issue has an impact, " a market player said about pricing.
" But consumers are only willing to pay up to a certain extent
before it becomes unviable. "
INDUSTRY RUNDOWN
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