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Viewpoint: US base oils market faces 2018 oversupply

29 Dec 2017 12:00 GMT
Viewpoint: US base oils market faces 2018 oversupply

Houston, 29 December (Argus) — The balanced-to-tight 2017 US base oils market could return to oversupply in 2018 on likely increases in Group II and Group I production amid less planned maintenance and increased supplies of unapproved Group III base oils.

A 52pc surge in US base oils exports in the first eight months of 2017 added to and helped sustain tight supplies throughout the year, according to US Energy Information Administration (EIA) data. This trend is likely to continue in 2018 as US Group II and Group I base oils producers tap the export market in order to clear their surplus supplies.

More Group II supplies from the US Gulf coast moved to Europe in 2017. Some of these additional supplies started to move ahead of the expected start-up of Group II production in the region in early-2019.

The Mexican fuel market is likely to remain a key outlet for surplus US light-viscosity paraffinic and naphthenic base oils in 2018. The use of extra-light-viscosity base oils as a fuel extender for diesel has grown in the Mexican market over the past two years. US base oils exports to Mexico have increased 65pc from the second quarter of 2015 to the second quarter of 2017, even as the country's lubricant demand has declined. This trend is likely to continue as long as it remains cheaper to import light-grade base oils than to import diesel.

Group I supplies are likely to remain balanced through the first quarter of 2018. HollyFrontier will have a six-week-long planned maintenance on several units at its Tulsa, Oklahoma refinery, including the facility's sole crude unit, during this time.

But Group I supplies will likely increase from the second quarter of 2018 after that planned maintenance ends and exports to southeast Asia slow down after TonenGeneral's Group I plant in Japan completes repairs and resumes its heavy grade production.

Group II supplies are likely to remain more balanced than usual in the first three months of 2018.

The producers that had hurricane-related shutdowns in the third quarter of 2017 are likely to have smaller-than-usual spot supplies in early 2018.

Group II production in the US Gulf coast is likely to be steadier in 2018 compared to 2017. All of the major US Group II refineries had two shutdowns in 2017. There is less Group II refinery maintenance planned in 2018. Only a couple of North American virgin Group II refineries will have planned maintenance sometime in 2018.

Group III supplies are also likely to remain balanced in the first couple of months of 2018. But supplies of Group III base oils without additive approvals will increase in the first quarter. More of these unapproved Group III supplies from domestic US and Mideast Gulf producers will be available in the US market.

Most semi-and fully-approved Group III base oils that move into the US are term supplies. But more unapproved Group III supplies will begin to move from the Mideast Gulf to the US in the first quarter of 2018. Any continued drop in gas-to-liquids base oils shipments from the Mideast Gulf to the US could help to absorb unapproved Group III supplies in the US.

A couple of US producers have recently converted some of their Group II production to Group III. These producers will continue to offer their unapproved Group III light- and mid-viscosity supplies into the domestic US market in 2018.