HOUSTON (ICIS)–US base oil markets are
atypically tight heading into the fourth
Snug supply is supporting firm pricing despite
the slow recovery downstream as coronavirus
continues to weigh on the finished lubricants
sector and overall economy.
The one-two punch of reduced refinery rates
earlier in the year and an especially active
Atlantic hurricane season dealt a blow to the
US’ usually ample Group II supply position.
Hurricanes threatened three of the four major
US Group II base oil suppliers, and anywhere
from 15-41% of virgin production capacity was
off line from late August through much of
The Group II shortage has not only affected
domestic customers, but it has prevented the US
from satisfying robust overseas demand that
accelerated in August.
Supply fundamentals have propped up pricing,
with support from firm costs for feedstock VGO.
Pressure is expected to persist until
production constraints ease and inventories are
built — counter to a typical fourth quarter in
which producers would be clearing surplus
supplies into the market.
REDUCED PRODUCTION AFFECTS SUPPLY
Demand picked up in late
June as manufacturing activity resumed,
spurring buying appetite for finished
lubricants. Supplies dwindled as that happened
and as producers moved material into export
Supply was sufficient to meet needs, but it was
reduced from normal levels.
This was partially driven by the fact that
refiners kept their rates reduced because of
ongoing weak demand for gasoline and diesel
that led to oversupply.
The three-year median for US refinery
utilisation is 90%, according to the Energy
Information Administration (EIA).
Since COVID-19, the highest it reached was 82%.
The low point was 67.7%.
Base oil units were estimated to be running at
even lower rates than this during the peak of
the Q2 downturn.
Through July, US paraffinic net lubricant
production was down by 13% compared with the
same period in 2019, according to the EIA.
May was the low point. Production was down by
25% compared to the average of the previous
four years for that month.
Rates began to improve from there, with July
output up 19% over May. Still, July production
was down by 14% year on year.
Gasoline consumption never returned to
pre-COVID levels with virus restrictions
lingering well past original estimates, and the
winter season typically sees lower demand.
For both refinery output and base oil
production, an especially active Atlantic
hurricane season compounded the problem.
Hurricane Laura shut 41% of US Group II virgin
refining capacity as both Motiva (38,300
bbl/day) and Phillips 66’s Excel Paralubes
(22,200 bbl/day) shut ahead of the storm,
according to the ICIS Supply and Demand
Laura devastated the Lake Charles, Louisiana,
area and the power grid required nearly a
Motiva was able to restart soon after Laura
passed, but Excel Paralubes was more directly
in the path and remained off line well into
October. It accounts for 15% of US capacity.
Phillips 66 received power by early October,
but Hurricane Delta delayed the restart
timeline for its Lake Charles refining complex
as the storm took nearly the same path as
Excel’s outage and ongoing reduced rates by
other refiners kept the US very tight. Base oil
producers are focused on supplying their
domestic contract customers. Spot availability
quickly dried up.
Supply is tighter for N220 and N600 compared
It is not likely that US suppliers will much
surplus until the first quarter of 2021.
PRICES FIRM ON TIGHT SUPPLY, IMPROVING
Tight supply prompted a
round of posted price increases ranging 15-30
cents/gal from mid-September to early October.
Buyers looked to secure additional volumes from
alternative suppliers with Excel shut, but
producers had a difficult time meeting the
With suppliers focused on honoring their
contracts and any agreements in place prior to
Hurricane Laura, spot activity is largely
muted. If it can be found, it is at a premium.
Downstream demand is strong ahead of finished
lubricants price increases.
STRONG OVERSEAS DEMAND LIFTS EXPORT
tightness also means the US was no longer in a
position to satisfy growing demand from
overseas markets, particularly India and
August export volumes were at a three-year high
for the month despite ongoing recovery from
coronavirus on the finished goods side,
according to the ICIS database.
Volumes to India skyrocketed year on year in
August and more than doubled July’s volumes.
Year to date, volumes to India are up by 41%
compared with 2019.
Supply was tight in India, with limited
availability from Asia or the Middle East, so
buyers looked to the US despite the higher
freight rates it would take to get material.
Volumes to Brazil were 64% higher year on year
in August and 53% higher month on month.
Volumes to Brazil were down sharply during the
Q2 lockdown period, so year-to-date exports are
down by 25%.
Local Brazilian supply has been limited since
June, driving an increase in demand for US
Strong overseas demand lifted Group II export
prices in line with domestic pricing, whereas
it typically runs at a 20-30 cent/gal discount,
before the hurricane.
Post-Laura spot export prices firmed to
premiums over contract although little material
The premium to feedstock VGO widened
FEEDSTOCK COSTS FIRM, SUPPLY
Feedstock VGO was also snug
because of reduced refinery rates, which was
compounded due to hurricane-related closures of
several US Gulf Coast refineries including
Phillips 66 in both Lake Charles and Belle
Chasse, Louisiana, and CITGO in Lake Charles.
Belle Chasse was shut ahead of Hurricane Sally,
but remained down and began planned maintenance
Tighter supply caused VGO to strengthen
relative to crude around late September. VGO
had already been on a firm upward trend for two
months prior to Laura.
While costs were firm, base oil price increases
outpaced VGO increases so margins were good on
paper—though suppliers likely did not have
material to sell.
Base oils are used to produce finished lubes
and greases for automobiles and other
Insight article by Amanda Hay