ILMA Compoundings – December 2019 - 12

INDUSTRY RUNDOWN

Market Report
Supply Remains High in Q4, IMO 2020 Looms
By Amanda Hay
The U.S. base oils market grew longer heading into the
fourth quarter of 2019 following a stable and balanced
summer, while cost pressures waned for base oil producers.
As supplies lengthened on the back of new production,
strong production rates at existing plants and growing
imports, demand remained in the same steady-but-soft
pattern noted throughout the year.
Downstream sectors experienced sales that were largely
below expectations in 2019 as struggling global economies
have weighed on business in the U.S. and created challenging market conditions.
Fundamentals created some pressure for the fourth quarter, while market players were also looking ahead to how
IMO 2020 and the new ILSAC GF-6 standard for engine
oils will impact base oils supply and prices in the new year.
SEARCHING FOR COST STABILITY
After a steady rise in crude futures through the first half of
the year, when a number of base oil price increases were
implemented, crude futures turned increasingly volatile.
A temporary spike in crude futures twice encouraged a
posted-price increase that ultimately did not find support as
futures retreated nearly as quickly as they spiked - once in
July by Chevron and again in September by ExxonMobil.
Crude volatility kept prices steady - each increase was
rescinded - as market players were looking for a clearer trend.
One of the increases emerged just prior to the ILMA
Annual Meeting, where market players largely agreed that
supply and demand fundamentals did not support price
increases heading into the fall.
Participants were in wait-and-see mode at the event,
searching for more clarity in crude price direction before
making any decisions on prices for the fourth quarter.
Likewise, buyers retreated to the sidelines.
Global crude oil continues to be well-supplied, especially
on the back of U.S. output, which moderated on tightened
spending in the oil patch this year but remains on pace to
top record-year 2018, according to the U.S. Energy Information Administration (EIA).

DECEMBER 2019

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Ample crude supplies have capped any crude gains and
likely will continue to do so, barring significant and sustained interruptions to U.S. or Middle East production.
As cost concerns eased into the second week of October
- with Brent falling to just above $58 per barrel and West
Texas Intermediate (WTI) to just below $52 per barrel
- market players maintained the wait-and-see sentiment
surrounding the ILMA meeting to determine whether the
downtrend would be sustained.
Notably, the spread between Brent and WTI widened.
SUPPLY OUTPACES DEMAND INTO Q4
U.S. base oils supplies improved from a snug position earlier
in the year and found comfortable length by October, ahead
of some planned maintenance by multiple producers.
Improved supply was primarily due to expanded domestic
production by Chevron, rising import volumes and strong
production rates for existing units in the U.S.
Chevron bolstered supply after it began producing Group
II+ base oils at its Richmond, California, and Pascagoula,

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ILMA Compoundings – December 2019

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