US base oils markets are likely to face downward pressure for the rest of 2018 amid slower seasonal demand and increased supply.
Higher feedstock prices and balanced supplies prompted paraffinic base oils producers to raise their posted prices three times in the first half of the year.
The domestic market has remained mostly balanced in the first-half of the year as producers have continued to regularly clear a large volume of excess supplies in the export market.
A steady surplus of Group II supplies appeared from the second-half of March, mostly of heavy-viscosity grades. Spot supplies of light grades had been more limited, but they began to increase in the second-half of June.
US base oils exports during the first four months of the year increased to their highest levels since the US Energy Information Administration (EIA) began keeping records in 1981. The US exported 14.95mn bl of base oils between January and April 2018, up from a record-high of 13.93mn bl during the same four-month period in 2017.
Most of the planned maintenance at base oils refineries was completed in the first six months of the year. The refinery work helped curb some excess production, but the round of spring maintenance was still relatively light compared with the same time last year.
This helped to support higher spot prices in the domestic market, but export prices have not received the same price-support from the moves. Producers have kept their spot export prices for their bulk cargo volumes at a lower level as they continue to clear excess supplies into various overseas markets.
While domestic prices mostly held firm, a persistent surplus of Group II heavy grades and growing Group III imports in the first-half of the year placed downward pressure on prices for these supplies.
The US imported 5.63mn bl of base oils in the first four months of the year, according to the EIA, up 19.4pc from 4.71mn bl imported during the same period in 2017. Most of these imports are Group III base oils.
These additional supplies prompted Group II N600 and Group III 4cst premiums to Group II N100 to narrow to their lowest levels in several years in mid-2018.
The Argus domestic spot US Group II N600 premium to domestic spot US Group II N100 narrowed to $0.26/USG in late May, its lowest since early March 2015. The premium increased slightly to $0.31/USG in late June. But it still hovered around its lowest levels since April 2015.
The Argus domestic spot US Group II 4cst premium to the Argus domestic spot US Group II N100 in late June 2018 narrowed to $0.52/USG, its lowest level since mid-April 2011. The Group III 4cst premium to N100 had held above $1/USG between 2012 through mid-2017.
These premiums are likely to continue to shrink. Prices for all base oils grades are likely to continue to ease in the second-half of the year because of growing supplies. Prices for Group II heavy grades and Group III base oils, in particular, are likely to face even greater downwards pressure.
Surplus supplies are likely to increase in the second-half of the year because of steadier production, slower domestic demand and increased imports. Planned refinery maintenance in the second-half of the year is especially light. This will likely add to a surplus overhang of most base oils grades. Increased imports of Group III base oils are also likely to continue to add to the growing surplus of premium-grade supplies.
Domestic demand typically weakens in the second-half of the year, with fourth quarter demand particularly weak as blenders seek to empty their tanks before the end of the year. The slower second-half demand, combined with steady production from most refineries, is likely to add to the surplus overhang of paraffinic mid- and heavy-viscosity grades.
