ILMA Compoundings - May 2019 - 20

INDUSTRY RUNDOWN

Market Report
US Base Oils Market Faces Oversupply
By Iain Pocock
U.S. base oil prices remained unusually weak in early
2019 because of a persistent supply overhang and slack
demand. Outright base oil prices have been trending
lower since mid-2018, reflecting the impact of surplus
supplies throughout most of last year. The price weakness contrasted with rising crude prices, especially in the
third quarter of last year. The subsequent squeeze on
base oil margins prompted refiners to cut back base oil
production and divert feedstock to produce more motor
fuels instead during the last few months of last year.
MARGINS FACE MORE PRESSURE
Base oil prices fell at a slower pace than crude during the
final quarter of 2018. That helped to spur a brief revival in
base oil margins. But the revival was short-lived as crude
prices began a steady recovery at the start of this year.
The growing squeeze on margins has put increasing
pressure on producers to raise prices. The Argus domestic spot
U.S. Group II N100 premium to four-week average U.S.
Gulf Coast diesel prices fell to less than 10 cents per gallon
in the first half of March. That was its lowest level since early
November and close to its lowest level in more than a decade.
In recent years, producers have raised their posted prices
several times during the first few months of the year. But the
plentiful supply enabled buyers to resist against any moves
to raise prices with relative ease during at least the first two
months of this year.
Domestic buyers have faced little urgency to secure more
supplies. Demand faced a seasonal slowdown at the end
of last year and early this year. In response, some buyers
focused during the first few weeks of 2019 on consuming
supplies from existing stocks. A seasonal pickup in demand
was relatively muted in late February and early March,
partly because colder and wetter weather pushed back the
start of the oil-change season.
A relatively light round of base oil plant maintenance in
the U.S. market so far this year has curbed further buyers'
needs to seek alternative supplies to cover requirements.

MAY 2019

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PRODUCERS EXPORT SURPLUS SUPPLIES
U.S. producers focused instead on moving more of their surplus supplies to overseas markets. With their supplies more
balanced, they would then have more leverage to raise their
domestic prices.
A large volume of mostly Group II arbitrage shipments
has moved to West Africa, India and Latin America in recent
months. Some spot supplies moved to Europe. Producers
adjusted their prices accordingly to make these deals feasible.
To target West Africa, prices had to be more competitive
than European or Baltic Group I supplies. To target the
Indian markets, prices had to be at least as competitive as
supplies from Asia-Pacific and the Mideast Gulf.
The strategy generated some success in view of firm demand
in each of those markets. Mexican buyers continued to seek
large volumes of light-grade base oils for use as a fuel extender
with diesel. Indian buyers sought additional shipments during
the first quarter of the year to cover for a drop in supplies
from northeast Asia and the Mideast Gulf. Exports from those
markets dropped because of scheduled plant maintenance.
EXPORTS EASE PRESSURE ON DOMESTIC PRICES
One effect of these moves by U.S. producers to open the
arbitrage to those markets was a widening of the spread
between U.S. domestic and export prices. The discount of
Argus fob U.S. export N100 prices to domestic prices widened to as much as 14 cents per gallon by early March. The
N600 discount widened to as much as 22 cents per gallon.
That was their widest levels since June 2018.
Even if producers were unable to raise domestic prices
during the early months of 2019, they at least halted the
downward pressure on prices with this strategy.
The prospect of a strong pickup in domestic U.S. demand
from the second quarter of the year would then soak up
more of the producers' surplus volumes and curb the need
to tap these overseas markets. Conversely, a weaker-thanexpected rise in domestic demand would force producers to
continue to rely on those overseas markets.

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ILMA Compoundings - May 2019

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