Latin American base oils demand increased over the past months as supplies tightened in the regional and global markets. Base oils supplies were especially tight in Europe and the US markets as refinery run-cuts and maintenance curbed production in both regions.
Join Camila Dias, Argus Brazil Country Manager, and Kauanna Navarro, the Latin American reporter for the Argus Americas Base Oils publication, as they discuss the base oils supply and demand globally and in Latin markets.
CD: Hello and welcome to 'Market Talks'- a series of podcasts presented by Argus addressing the main events impacting commodities and the energy sector in Brazil and worldwide. My name is Camila Dias, Argus Brazil Country Manager. In today's episode, I talk to Kauanna Navarro, the Latin American reporter for the Argus Americas Base Oils publication, about the supply and demand on the base oils market both globally and in Latin America. Welcome, Kauanna.
KN: Hi, Camila. It's a pleasure to talk to you.
CD: Kauanna, how is the demand for base oils in Latin American markets after two years of pandemic and with the ongoing conflict in Europe?
KN: Camila, the Latin American markets have indeed suffered from the economic recession caused by the pandemic. People were locked in their homes for almost a year, waiting for the vaccines. This reduced car usage and, consequently, reduced finished lubricant changes. The industry also demands base oils, but operation capacity has been reduced worldwide, bringing lubricant demand down with it. The scenario is worse when we consider economies not so consolidated as Europe countries and the US, like Latin America.
Here, demand was slow in 2020 and continued so in 2021. And, when all the engines seemed to be back to their regular rhythm, the Russia-Ukraine conflict messed up supply and slowed demand recovery.
In the last few months, though, we have seen Latin American base oils demand increase as supplies tighten in regional and global markets — not because finished lubricant sales are back to prior-pandemic levels, but more as a result of fewer inventories.
CD: So it's not an easy scenario for base oils. You mentioned the Russia-Ukraine conflict impacted the supply. Could you explain more?
Russian supplies are no longer moving into the European market. This has left a supply gap to be covered by regional Group I and Group II supplies. Russia typically produces around 1.2 million metric tonnes/year of Group I base oils. Most supply the Russian domestic market and its surrounding regional markets, and many would also move to the European market. But Russian supplies have stopped moving to Europe after EU sanctions and boycotts stopped shipments.
CD: Is this the main reason for tight global supply?
Not really. Besides the escalating conflict between Russia and Ukraine, the European market had a heavy round of regional plant maintenance. At least 24pc of European Group I nameplate capacity was offline in June, according to Argus proprietary supply index, as three key refineries in the region had overlapping maintenances.
Now, these maintenances are almost finished, and production is returning to normal levels.
CD: Latin markets mostly import products from the US, right? How does Europe affect our markets?
There are two different situations on this topic. First, US supply was also reduced. Group II availability is tight, following a sooner-than-expected maintenance at several key US Gulf coast refineries. In June, a key refinery replaced its catalyst. Another two refineries will switch out catalysts in the third quarter of this year and in the first quarter of 2023.
Firm domestic demand is also keeping US supplies balanced. Some market participants are building and maintaining inventories during the Atlantic hurricane season, which runs from June until the end of November. There is limited spot availability for Latin America.
The second issue is that Latin markets do purchase Group II base oils produced in Europe. Meanwhile, Group I tightness has left a supply gap to be covered by regional Group I and Group II supplies. Group I blenders are switching their formulations to Group II, which has raised Group II costs. Higher base oil prices can also be attributed to costlier feedstocks and tighter vacuum gasoil (VGO) supplies, both affected by sanctions on Russian oil and refined products. In June, the VGO premium to WTI crude oil rose to the highest levels since March 2013.
CD: Basically, are Latin American markets disputing for product with Europe and the United States? And how is the situation in the Asia-Pacific region?
The demand in Europe is weakening, and current prices and freight rates are discouraging Latin American buyers.
In Asia-Pacific, weaker regional demand and increasing output have boosted spot availability. Some of these excess supplies are targeting the LatAm market, where more South American buyers are willing to accept higher prices to attract imports. But logistical constraints, limited vessel space and rising freight rates have dampened the flow of more Asian-Pacific arbitrage shipments to the region.
CD: Besides the supply situation, do we also have logistical problems, then?
Absolutely. I would even say that logistics are now as important or, maybe, even more important than the supply tightness.
CD: Why do you say that?
That's because the maintenances are finishing up. Also, Europe demand is not as strong as in the US. But logistics are a huge problem, and the end of the tunnel is not clear yet. Currently, there aren’t many vessels to send to South American markets; when there is one, there isn't enough space for cargo averaging 7,000t. Besides, we are facing a global shortage of bunker supply, which has generated demand from some shipowners to lock in volume through forwarding contracts, and not many fuel sellers can meet such requests. Also, freight rates keep increasing, which makes imports less competitive for LatAm buyers.
CD: All these factors apply to Brazil. But is there something else you would add about the Brazilian base oil scenario?
I always have something more to say about Brazil. Our domestic production is typically sufficient to cover demand. But recent price increases have encouraged some Brazilian buyers to seek alternative supplies. Imports to Brazil are expected to increase in the second half of the year.
Brazilian refineries are prioritizing diesel production because of high margins. Domestic demand for motor fuel is expected to increase ahead of and during the final quarter of the year, during peak agricultural season. This is expected to reduce domestic base oil production, making Brazilian buyers more reliant on imports to cover any additional demand.
And usually, the domestic prices in Brazil are lower than in Europe or even Asia. This scenario is changing in the last few months, and Petrobras' prices are becoming more in line with global prices.
Brazilian domestic Group I and naphthenic base oil prices continue to increase. The prices rose by 20pc in April, 15pc in May, and increased another 10pc in June. In July, the rhythm of the increases reduced, and the prices rose by 4pc.
CD: There is a lot is going on in the LatAm base oils market, then. Thank you, Kauanna. This and other episodes of our podcast are available on the Argus website at www.argusmedia.com. Visit the page to follow the events that affect global commodity markets and understand their developments in Brazil and in Latin America. We'll be back soon with another edition of “Market Talks”. See you soon!