INDUSTRY RUNDOWN Market Report US Base Oils Market Faces Rising Supply, Elevated Exports in 2018 By Eva Molina In 2017, U.S. domestic base oils production and imports increased while exports surged and domestic demand decreased. These same supply-demand trends have continued in the first quarter of 2018. This has raised expectations for increased base oils supplies this year because of stronger domestic production and increased imports. Export volumes are also likely to continue to rise to offset increasing supplies and decreasing domestic demand. LIGHTER MAINTENANCE TO SUPPORT OUTPUT A lighter round of planned refinery maintenance for 2018 has raised expectations for stronger and steadier base oils production throughout the year. Less planned maintenance has also raised expectations for plentiful spot supplies. Last year saw a heavy round of planned and unplanned refinery maintenance. All of the major U.S. Group II refineries had two shutdowns between March and September 2017. Half of the shutdowns during this period were unplanned. Only one major Group II refinery in the region has scheduled maintenance this year: A North American refinery of premium-grade base oils will have a 40-day planned turnaround in the fourth quarter. Meanwhile, a couple of major U.S. Gulf Coast refineries have experienced production issues and unplanned maintenance in the first quarter of the year. A major Group II refinery had unplanned maintenance on the larger of its two crude units in late February. Another U.S. Gulf Coast refinery has had lingering production issues that are likely related to damage sustained from extensive flooding caused by Hurricane Harvey. The remnants of the Category 4 storm dropped record rainfall in southeast Texas in late August 2017 and caused unprecedented flooding along the Texas coast that disrupted production at several base oils refineries. A couple of U.S. Gulf Coast refineries have planned crude unit maintenance in the second quarter of 2018. The impact of these turnarounds on base oils production remains unclear. There was some planned Group I and naphthenic refinery maintenance between late January and late April. There is 22 APRIL 2018 | COMPOUNDINGS | ILMA.ORG no Group I and naphthenic refinery maintenance planned for the second half of the year. GROUP III SUPPLIES RISE In 2017, several virgin producers started to generate Group III light grades through hydrocracking existing Group II output. A couple of re-refined Group II producers also changed their used motor oil feedstock to produce Group III base oils. The increased domestic Group III production comes as more premium-grade supplies from the Mideast Gulf and Russia target the U.S. More Group III supplies with limited approvals from the Mideast Gulf will target the U.S. this year. Fully approved supplies from the same refinery already move to the U.S. The increase in Group III supplies has prompted spot prices to ease. The Argus domestic U.S. Group III 4cst premium to Group II N100 prices fell below a dollar per gallon in mid2017 and have held around 70 cents per gallon since. US HEAVY-GRADE CAPACITY RISES ExxonMobil recently announced that it will begin to produce and distribute a Group II N600 grade from its Baytown, Texas, facility in 2019. It remains unclear whether the new production capacity will be a conversion of the facility's existing Group I heavy-neutral production or an expansion. The addition of Group II heavy-grade production at the Baytown facility follows a recent trend in which base oils producers seek to increase or maximize their heavy-grades output. All recent capacity expansions in the U.S. have increased heavy-grade production. Several Group I and naphthenic refineries increased their Group I heavy neutrals and bright stock production in 2015 and 2016. Some other Group II refineries have recently tweaked their production to increase their N600 output. This has led to more surplus supplies of heavy-grade base oils. This activity has narrowed the heavy-grade premium to light-grade base oils. The Argus domestic U.S. Group II N600 premium to N100 stood at 40 cents per gallon in late February. This is below a premium of 71 cents per gallon during the same week in 2017 and below a premium of 95http://www.ILMA.ORG