ILMA Compoundings - February 2020 - 16

INDUSTRY RUNDOWN

Market Report
U.S. Base Oils Prices Weaker in 2019
By Eva Molina
U.S. base oils prices finished the year 2019 lower than
year-earlier levels.
Prices in the first and fourth quarters of the year were
depressed because of weak supply-demand fundamentals. More
balanced supplies and steady demand helped support firmer
prices through the second and third quarters of the year.
The weakness in the first and fourth quarters of the year
outweighed the firmer prices seen in the middle of the year.
But that relative price strength in the middle of the year
helped to cushion the pressure on base oils margins.
The Argus domestic spot U.S. Group II N100 premium
to four-week average low-sulfur vacuum gasoil (VGO)
finished the year at $0.35/USG, down $0.23/USG from
year-earlier levels. But the N100 premium to low-sulfur
VGO averaged $0.45/USG for the full year, down only
slightly from $0.46/USG in 2018.
The Argus domestic spot U.S. Group II N100 premium
to four-week average diesel fell to $0.20/USG by end-2019,
down by $0.22/USG from year-earlier levels. The N100 premium to diesel averaged $0.28/USG for the full year, down
from $0.29/USG the previous year.
Producers responded to the weaker margins by changing
their production slates or cutting production runs to curb
their excess output. Some refiners incorporated contingency
plans this year in response to squeezed margins. The plans
involved shifting their feedstocks to produce alternative
fuels like diesel when base oils margins were compressed.
Those run-cuts, along with an array of other unexpected
production issues, resulted in a sharp drop in base oil
production, especially in the first half of the year. U.S. paraffinic base oils production averaged 4.21mn bl/month in the
first 10 months of the year, down 12.8pc from 4.83mn bl/
month during the same period in 2018.
But weaker domestic demand helped to keep surplus supplies
readily available. Demand averaged 3.44mn bl/month in the
first 10 months of the year, down 5.3pc from 3.63mn bl/month
during the same period last year. The consumption level was the
weakest for the first 10 months of the year since the U.S. Energy
Information Administration began keeping records in 1981.

FEBRUARY 2020

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PRODUCERS CHANGE POSTINGS LESS OFTEN
Producers changed their posted prices less frequently than
usual amid more balanced supply-demand fundamentals in
the second and third quarters of the year, and then less downward price pressure than expected in the fourth quarter.
Posted prices were raised only twice in the whole year, in
March and April. The prices were raised in response to higher
feedstock costs combined with firmer seasonal demand and
unexpectedly low production during that period.
Posted prices then remained unchanged for the rest of the
year. A couple of key U.S. Gulf Coast producers sought to
raise their prices in July and September in response to higher
feedstocks prices. But these price increases were rescinded
either before they took effect or shortly after.
Producers held off on lowering their postings in the
fourth quarter when supply-demand fundamentals weakened and spot prices fell. Producers instead gave their
domestic customers discounts or temporary voluntary allowances. The removal of a large volume of supplies through
the export market also helped to leave the domestic market
more balanced.
The unchanged posted prices lifted their premium to Argus
domestic spot U.S. Group II prices to their highest levels
since Argus began covering the base oils market in 2010.
Motiva's Group II posted prices premium to Argus' domestic spot U.S. Group II prices averaged $0.48-0.51/USG in
2019, up from $0.29-0.32/USG in 2018. Motiva's Group II
postings ended the year at their highest premium to Argus
domestic spot U.S. Group II prices, at $0.65-0.75/USG.
EXPORTS REMAIN HIGH
Besides lower output, producers kept the U.S. market
balanced by maintaining high export volumes. These held at
32.34mn bl in the first 10 months of the year. The volume
was down slightly from year-earlier volumes of 32.72mn bl.
But it was still the second-highest on record.
Exports to Europe remained high despite the startup of
new Group II base oil production in that region. Exports to
Latin America continued to grow as Group I production in
the region fell.

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