ARGUS DOMESTIC SPOT US GROUP II VS. PRODUCER POSTINGS ($/USG) $3.80 Motiva's N600 posting Chevron's N600 posting Argus dom spot N600 $3.60 USD/US gal $3.40 $3.20 $3.00 $2.80 $2.60 $2.40 $2.20 $2.00 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Jul '18 ARGUS DOMESTIC SPOT US GROUP III 4CST VS. PRODUCER POSTINGS ($/USG) $5.00 SK's 4cst posting P66's 4cst posting Argus dom spot US 4cst USD/US gal $4.50 $4.00 $3.50 $3.00 $2.50 Jan '16 customers in July. These types of discounts typically precede posted price cuts. Several Group II re-refiners also placed their excess supplies in the domestic spot market by completing deals at a steep discount to the Argus domestic U.S. Group II N100 spot price range in July. The growing surplus of Group II base oils also put downward pressure on Group I prices. These prices also fell in the second half of July even as supplies of light neutrals and bright stock remained mostly balanced. Some production issues and unplanned shutdowns at several refineries in July helped to curb excess Group I production. A couple of the producers continued to have excess supplies, mostly of heavy neutrals, but these remained manageable. Group III prices began to drop from early June because of increased imports and slower domestic demand. Existing Group III supplies have faced pressure from lower prices for Group III supplies with limited approvals. Most of the Group III surplus is 4cSt. Supplies of 6cSt and 8cSt have been more balanced because smaller volumes of these grades have been imported into the U.S. More than 150,000 tons of Group III base oils was imported into the U.S. in June and July combined. Base oils imports in the first five months of the year had already increased by 7.5 percent from the same period in 2017. Jul '16 Jan '17 Jul '17 Jan '18 Jul '18 LOOKING AHEAD TO Q4 2018 U.S. base oils prices are likely to continue to face downward pressure from a growing surplus and seasonally weak demand during the final quarter of the year. U.S. base oils production is also likely to remain steady amid a lighter round of planned maintenance work. Imports of mostly Group III base oils are also likely to remain high as overseas supplies continue to target the U.S. market. U.S. exports will need to stay high to offset the buildup of excess supplies. These shipments could be supplemented by a large volume of supplies that has been in storage tanks to cover for any weather-related supply disruptions during the third quarter. A large volume of mostly Group II base oils was placed in storage tanks ahead of the Atlantic hurricane season. Base oils producers and lubricants blenders built up a larger buffer this year than they have in previous years, reflecting moves to cover against the kind of supply crunch that many faced after a Category 4 hurricane hit the Texas Gulf Coast in late August 2017. But if there are no weather-related supply disruptions this year, these supplies will need to be cleared from storage tanks before the end of the year. Molina is the editor of Argus Americas Base Oils. She can be reached at 713-360-7560 or eva.molina@argusmedia.com. 29