INDUSTRY RUNDOWN Market Report U.S. Base Oils Prices Face Pressure Amid Virus Outbreak, Weak Crude Prices By Guo Harn (Marc) Hong U.S. base oil prices will face downward pressure from weaker fundamentals and lower crude prices. These factors will outweigh any price support arising from lower refinery run rates or stricter marine and motor fuel standards being implemented this year. Base oils demand typically gets a seasonal boost in March and April during the spring oil-change season. This year, some of that buying took place earlier than usual after U.S. producers raised their posted prices in January. Demand then halted as the COVID-19 pandemic spread throughout the country. The worsening coronavirus outbreak in the U.S. and measures implemented to contain its spread have slashed social, economic and industrial activity. The moves have cut demand for transport fuels and lubricants used in the machinery those fuels operate. A slowdown in manufacturing and marine sector-related activities will cut demand for Group I base oils used in industrial and marine lubricants. A slowdown in commercial operations and transportation curbed demand for Group II and Group III base oils in engine oils. Argus domestic spot Group III 4cst minus Group II N100 ($/USG) $1.40 $1.30 $1.20 $1.10 $1.00 $.90 $.80 $.70 $.60 $.50 $.40 Jan 2015 Aug 2015 16 Mar 2016 Oct 2016 May 2017 Dec 2017 Jul 2018 MAY 2020 | COMPOUNDINGS | ILMA.ORG Oct 2017 Feb 2019 Apr 2020 The slump in crude and diesel values has added to the downward pressure on base oil prices. The fall in global crude prices gathered pace from early March following the breakdown of the OPEC talks and subsequent moves by major producers to raise crude output. Weekly average prices for Light Louisiana Sweet crude fell by more than 55% in March to their lowest since early 2002. Buying interest decreased as economic activity slowed. More buyers held back and secured fewer supplies. They sought to stock up on higher-priced base oils. Many blenders chose to run down their inventories until they needed to replenish supplies. PRODUCERS' RESPONSE TO WEAKER MARKET DYNAMICS Producers quickly responded to the virus outbreak and the drop in crude values and demand. Producers cut their posted prices twice in March. The combined cuts ranged between $0.70 and $1 per gallon, slashing the premium of producer posted prices to Argus U.S. domestic spot prices. Several refineries cut their crude production run rates in March and April in order to curb their production of gasoline. Some refineries also reduced production rates on their base oils units. It remains unclear to what extent U.S. base oils production will be affected by any more widespread refinery run cuts. Directives to contain the spread of the virus and slumping oil product margins increase the prospect of run-cuts. These would likely curb base oils production and supply. Any such cut in production would help to sustain firm base oil margins, which extended their surge in March, peaking at their highest levels since 2012. MEXICO SHUT AS KEY OUTLET FOR U.S. LIGHT GRADES Even if supply falls, U.S. base oils prices are set to face pressure from decreased demand from its key outlet for surplus light-grade supplies. Demand from Mexico for lightgrade imports from the U.S. fell after diesel prices slumpedhttp://www.ILMA.ORG