INDUSTRY RUNDOWN Market Report Firm Overseas Demand to Boost U.S. Base Oils Prices By Guo Harn (Marc) Hong U.S. base oil prices are forecast to edge upward over the coming months amid firmer overseas demand that helps to keep supply more balanced. Prices are then set to face downward pressure in the fourth quarter of 2020 as supply availability rises and domestic demand ebbs. The extent of that price pressure is likely to be smaller than usual as overseas demand remains firmer than usual. Stronger demand from overseas markets like India, West Africa and Latin America provided growing support to base oil prices in the third quarter. Prices also received support from firmer feedstock prices. These factors countered weaker-than-usual domestic demand and left supply relatively balanced in August. Supplies, especially of Group II base oils, got tighter after Hurricane Laura struck southwest Louisiana in late August. The storm caused widespread power outages that stopped premium-grade base oils production at a couple of U.S. Gulf Coast refineries for three to six weeks. Buyers had mixed expectations on prices going into the fourth quarter. Some blenders moved to secure supplies in August amid expectations of higher prices. Other buyers held back from such moves amid expectations that prices will edge lower in the fourth quarter. Their uncertainty reflects weaker demand amid the continuing COVID-19 outbreak. Producers' expectations are also mixed. Most producers raised their posted prices in August and September. But there is uncertainty about whether the price increase will stick in the fourth quarter, when demand is typically slower. CRUDE, PRODUCTS PRICES TO EXTEND RISE IN 2021 While base oil supply-demand fundamentals remain uncertain, there are more widespread expectations that crude and refined product prices will extend their rise through August 2021. The trend is expected to provide additional support to base oil prices. Relatively low crude prices and refined product prices typically boost the attractiveness of producing more base 20 OCTOBER 2020 | COMPOUNDINGS | ILMA.ORG oils. But weak refinery economics have prompted refiners to maintain lower utilization rates. The trend has impacted the availability of feedstock to produce base oils and has capped any expected rise in base oil production. A projected rise in feedstock and competing fuel prices should limit any downward pressure on base oil prices, especially when fundamentals are firm. Rising crude values increase the cost of producing base oils. Rising competing fuel prices like gasoil and diesel typically increase the opportunity cost of producing base oils. This time around, a rise in competing fuel prices relative to crude oil from unusually low levels would incentivize refiners to boost run rates. The move would increase feedstock supply for base oils and the capacity for refiners to raise output. Prices for the lubricant feedstock are then forecast to rise from early 2021 on the back of firmer seasonal demand and rising feedstock levels as the market reverts to more typically seasonal supply-demand patterns. The COVID-19 outbreak distorted typical price and supply-demand trends in 2020 and masked the price impact of new regulations that were implemented during the year. A reversion to more typical trends in 2021 is likely to increase the impact of those regulations. IMO 2020 came into effect in January this year. The first license date of the new ILSAC GF-6 engine oil specifications was in May. These regulations were expected to boost demand for light- and premium-grade base oils because of their better suitability to meet the more stringent standards. Light- and premium-grade base oils are also closer substitutes for alternative fuels like diesel. They can be used in applications such as as a fuel extender. While the price impact from regulatory changes will likely be reflected more in 2021, rising supply availability would counter the extent of any price increase. An unknown factor over the coming year is the possibility of plant closures in other regions. Demand has already risen in some of those regions in response to a sustained fall in supply. Any permanent closure of base oil capacity would prompt buyers in those markets to seek even more supplies from sources like the U.S.http://www.ILMA.ORG