ILMA Compoundings – September 2019 - 20

INDUSTRY RUNDOWN

Market Report
U.S. Base Oils
Market Balanced
Through Early Q3
By Eva Molina
The U.S. base oils market remained mostly balanced
through July. Mostly balanced supplies and manageable surpluses supported firm prices.
U.S. base oils prices have held steady as a result. Prices
increased from mid-March through early June. Two rounds
of producer posted price increases in March and April helped
support steady to firm prices through at least late July.
Chevron raised its posted prices by 20 cents per gallon
on July 2 in response to higher feedstocks prices. But none
of the other producers raised their prices. Some domestic
blenders have accepted the higher contract prices, but others
requested discounts and expressed a willingness to secure
supplies from other producers that have not raised prices.
Some producers started to offer discounts or temporary
value adjustments (TVAs) in mid-July, despite the recent
posted prices increases. Some discounts were seen at 10
cents to 14 cents per gallon.
Chevron subsequently rescinded the price increase on July 23.
Supply-demand dynamics in the U.S. market had started
to show signs of weakening by mid-July. Domestic demand
was seasonally slower, and more surplus supplies had started
to build up as a result of the weaker domestic demand.
Producers then started to offer their surplus supplies into
the spot market. Most excess supplies have been offered into
the export spot market. Most producers were reluctant to
lower their domestic prices.
It became difficult in July for blenders to maintain their
price increases on finished products. More blenders started
to offer discounts to remain competitive and retain their
customers. Some blenders started to offer discounts on their
lubricants, despite the round of additive price increases that
took effect in June and July.

SEPTEMBER 2019

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ARBITRAGE SHIPMENTS TARGET THE AMERICAS
The temporary increase in Group II posted prices in July
lifted further the already-high U.S. prices relative to prices
in other regions. This helped keep open the arbitrage to
move to the Americas Group II supplies from Asia-Pacific
and Group I base oils from Europe and Russia.
A few arbitrage shipments of Group I bright stock from
Europe and Group II light grades from Asia-Pacific had
arrived in the U.S. in June and July. Most of these supplies
had been moved into the Mexican market.
The nearly two-month-long delivery time between the
purchase of shipments in northeast Asia and their arrival in
the U.S. has deterred more shipments from moving to the
U.S. Most Group II supplies in Asia-Pacific also lack U.S.
approvals. This means that these supplies can only be used
in some formulations, which limits their possible use among
U.S. blenders. Some buyers in South America have also
turned down offers for supplies from Asia-Pacific because of
a preference for U.S. supplies.
Spot activity slowed down from March through late July
because of the more limited supplies. Only a few large spot
export cargoes were shipped from the U.S. at the time.
A large volume of light-grade paraffinic and naphthenic
base oils has continued to flow into the Mexican market.
Demand for light-grade base oils from Mexico's fuels market
remains firm. Light-grade supplies from other regions, such
as Asia-Pacific, are also targeting the Mexican market.
The implementation of Mexico's diesel import tax from
2017 has created and kept open an arbitrage to move lightgrade base oils into the country, where it is blended with
diesel as a fuel extender. The country's tax on diesel imports
this year has averaged 86 cents per gallon. With the addition
of this import tax, the cost of importing light-grade base oils
in July was 40-50 cents per gallon lower than the cost of
importing diesel from the U.S. Gulf Coast.
GROUP II+, GROUP III SUPPLIES RISE
Premium-grade Group II+ and Group III supplies are
expected to increase in the U.S. in the second half of the year.
Domestic production and imported supplies of Group III
supplies will increase in the coming months.
Chevron will produce Group II+ and Group III base oils
in the U.S. The producer has upgraded its Group II N100

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ILMA Compoundings – September 2019

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