In recent months, the demand for base oils in Latin America has increased as supply has been restricted in the regional and global markets. Base oil supplies were especially tight in the European and US markets as refineries run cuts and maintenance reduced production in both regions. And the logistics to transport material to Latin America continues to be the biggest nightmare for importers.
Join Josh Vence, Business Development Manager for Latin America at Argus, and Kauanna Navarro, the Latin Americans reporter for the Argus Americas Base Oils publication, and as they discuss the dynamics between supply and demand for base oils in Latin America and globally.
Josh Vence (JV): Hello and welcome to 'Hablando de Mercado', a series of podcasts presented by Argus on the key trends and events affecting the energy and commodities sectors in Latin America and the rest of the world.
My name is Josh Vence, and I am the Business Development Manager for Latin America at Argus. In today's episode, we are joined by Kauanna Navarro, a journalist for the Argus Americas Base Oils report, sitting in our office in São Paulo, Brazil, and we will talk about the supply and demand for base oils globally and in Latin American markets.
Good morning, Kauanna. Welcome, how are you?
Kauanna Navarro (KN): Hi Josh. It’s a pleasure to speak with you.
JV: Thank you, Kauanna, for joining us. Tell us, how is the demand for base oils in the Latin American markets after two years of the pandemic and with the ongoing conflict in Europe?
KN: Josh, the Latin American markets have really suffered from the economic downturn caused by the pandemic. People were locked in their homes for almost a year, waiting for the vaccines to arrive. This reduced car usage and, consequently, reduced lubricant changes. The industry also demands base oils, but operation capacity has been reduced around the world, bringing lubricant demand down with it. The scenario worsens in Latin America, which has economies that are not as consolidated as the United States or European countries.
Here, demand was slow in 2020 and continued to be so in 2021. And, just when all the wheels seemed to return to normal, the conflict between Russia and Ukraine paralyzed supply and slowed down the recovery in demand.
In recent months, however, we have seen an increase in demand for base oils in Latin America. Supply in regional and global markets was reduced, not so much because lubricant sales returned to pre-pandemic levels, but rather as a result of less inventory.
JV: It is not an easy scenario for the base oil market. You mentioned that the Russia-Ukraine conflict affected the supply. Could you elaborate more on the subject?
KN: Russian supplies no longer entering the European market. This left a supply gap to be filled by the local producers of Group I and II. Russia normally produces around 1.2 million metric tons per year of Group I base oils. Most of the volume produced supplies the Russian domestic market and neighboring regional markets, but part of the production goes to the European market. With the current conflict, Russian supplies has stopped serving European countries as a result of sanctions and boycotts by the European Union.
JV: Is this the main reason for a tighter global supply?
KN: Actually, no. 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 production capacity was offline in June, according to the Argus proprietary supply index, as three major refineries in the region underwent maintenance at the same time. This maintenance is now almost complete and production is returning to normal levels.
JV: Latin American markets mainly import products from the US, right? How does Europe affect our markets?
KN: There are two different situations. First, the US supply was reduced. Group II availability is tight following a sooner-than-expected maintenance at several key refineries along the US Gulf Coast. In June, a key refinery replaced its catalyst. Two other refineries will change catalysts in the third quarter of this year and the first quarter of 2023.
Domestic demand in the US also keeps supply balanced. Some market participants are building and holding inventories for the Atlantic hurricane season, which runs from June through the end of November. All this limits the availability of the product in the Latin American spot market.
The second issue is that Latin American markets buy Group II base oils produced in Europe. The restriction of Group I in the European market left a supply gap to be covered by the local producers of Group I and II. Group I blenders are changing their formulations to Group II, which has increased costs for this group. Higher base oil prices can also be attributed to more expensive raw materials and tighter VGO supplies, both of which are affected by sanctions on Russian oil and derivatives. In June, the price of VGO premium to WTI crude oil rose to the highest levels since March 2013.
JV: In summary, are the Latin American markets disputing products with Europe and the United States? And how is the situation in the Asia-Pacific region?
KN: Demand in Europe is weakening and current prices and freight rates are putting off Latin American buyers.
In the Asia-Pacific region, weaker regional demand and increased output have boosted spot availability. Part of the excess supply goes to Latin American markets, where 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 shipments from Asia-Pacific into the region.
JV: In addition to the supply situation, are there also logistical problems?
KN: Sure. I would even go so far as to say that logistics are now as important, or perhaps more important, than supply constraints.
JV: Why do you think this?
KN: That’s because the maintenances are finishing up. Also, the demand in Europe is not as strong as in the United States. But logistics are a big problem and the end of the tunnel is not clear yet. Currently, there are not many vessels available to send to the South American markets; when there is a vessel, there is not enough space for cargo averaging, 7,000t. In addition, we are facing a global bunker supply shortage. This has generated demand from some shipowners and charterers to secure volume through forward contracts. The problem is that few fuel vendors can meet these requests. Likewise, freight rates continue to rise, making imports less competitive for Latin American buyers.
JV: All these factors apply to Brazil. Anything else to add about the current situation of the Brazilian base oil market?
KN: I always have something else to say about Brazil. Our national production is usually enough to cover the demand. But recent price increases have encouraged some Brazilian buyers to seek alternative supplies. The general expectation is that imports to Brazil will increase in the second half of this year.
Brazilian refiners are prioritizing diesel production, which has higher margins. What we are seeing is that the internal demand for fuel should increase before and during the last quarter of the year, when the grain transport peak in the country occurs. This dynamic should reduce domestic base oil production, making Brazilian buyers more dependent on imports to meet additional demand.
And, usually, domestic prices in Brazil are lower than Europe or even in Asia. This scenario has been changing in recent months and Petrobras' prices are becoming more in line with global prices.
Brazilian domestic Group I and naphthenic base oil prices continue to increase. Prices rose 20pc in April, 15pc in May and more than 10pc in June. And there are expectations of further price increases.
JV: How interesting to hear about all the things that are happening in the Latin American base oil markets. Thank you Kauanna for your time.
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