Page 16 - ILMA Compoundings - September 2021

INDUSTRY RUNDOWN Market Report

U.S. Base Oil Prices Face Downward

Pressure Through Mid-2022

By Guo Harn Hong
U.S. base oil prices face the prospect of more downward outpace production and deliveries. This is further limiting
pressure for the rest of the year amid a gradual recov- the availability of volumes for the spot market.
ery in supply availability and as demand shows signs HURRICANE SEASON PREP ADDS TO
of plateauing. But market fundamentals in the region SUPPLY TIGHTNESS
remain more supportive than in other markets. Prices
are also likely to remain much firmer than usual even as The Atlantic hurricane season has also prompted a round of
stock-building among buyers and sellers. Some producers
supply-demand fundamentals improve.
are holding onto more supplies as a buffer against any
Supply availability remains tighter than usual, even as a weather-related disruptions. Some buyers have also rebuilt
series of plant maintenance and production issues in the and added stocks to minimize the possibility and impact of
region and in overseas markets has mostly drawn to a close. any weather-related shortage of base oils.
The unprecedented arctic storm that struck the southern Finished-lubricant demand remained firm as more
U.S. and midcontinent in February caused extensive disrup- COVID-19 restrictions were lifted throughout the country.
tion to production. Other production issues extended the Road-transport activities and car sales have risen. Rising
supply tightness. The continuing extent of these disruptions lubricant prices also incentivize end users to bring forward
remains uncertain. their procurement plans. This trend of firm demand con-
With supply tight, producers continue to focus on trasts the typical slowdown in lubricant consumption in the
fulfilling term contract commitments. Some of them are second half of each year.
working to backfill orders. Those moves are set to extend Firm demand from neighboring markets like Latin
at least to September and October. New orders continue to
America is providing additional price support to U.S. base
oils. Demand remains firm in Mexico for extra-light grades.
ARGUS SPOT EXPORT GROUP II US N600 VS ASIA N500 ($/MT)
There is a wide price gap in that market between base oil
$1,800 grades going into lubricant manufacturing and base oils for
$1,600 use as diesel extender.
The key uncertainty for now is the possibility of any
$1,400
weather-related disruption. In the absence of any such dis-
$1,200
ruptions, prices face the prospect of more downward pressure.
$1,000 For refiners, stocks that were held back as a buffer are likely
$800 to be released into the market. For buyers, excess inventories
would limit the need for any replenishment supplies.
$600
$400 STRONG MARGINS INCENTIVIZE INCREASED
PRODUCTION
$200
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Firm base oil margins are also expected to incentivize
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
higher refinery utilization rates, should producers have the
US N600 fob Asia N500 fob
flexibility to do so.

14 SEPTEMBER 2021 | COMPOUNDINGS | ILMA.ORG