ILMA Compoundings - August 2019 - 20

INDUSTRY RUNDOWN

Market Report
Into a Game-Changing
New Decade
2019's second half is unlikely to
mirror first half for base oils
By Judith Taylor
At June, the middle of 2019, prospects appeared unlikely
for the second half of the year to mirror the first half.
The first half of the year began with sagging demand and
base oil pricing that just narrowly kept margins at viable
levels. However, changing factors lifted prospects and set the
first half of the year into a price-increase flurry beginning
late in the first quarter and stretching into the second.
In January and February, drooping base oil prices and
thinned margins dominated the base oil side, even as
feedstock vacuum gas oil (VGO) costs moved up. Crude oil
prices meandered in the low $50s per barrel (/bbl) until February, when they bumped into the low $60s/bbl, beginning
to hold potential support for higher base oil prices.
VGO prices moved up faster than crude oil, hitting the
mid-$60s/bbl in February and gaining at least a 10% jump
over crude oil's upward track.
Graph 1 shows the 2019 price trend for West Texas
Intermediate (WTI), Louisiana Light Sweet (LLS)
and VGO.
A key point on the graph is at late March, about March 29,
when WTI was at $59.53/bbl and VGO was at $74.66/bbl.
The disparity between these two, with LLS tracking similarly,
pressured refiners and base oil producers to consider raising
posted prices in order to sustain margin viability.
By mid-March, Group II producers found support for
posted price increases and began to refurbish narrow margins, with increases ranging 10-20 cents per gallon (/gal),
some slightly more, depending upon the producer and the
viscosity grade.
Group II+ producers moved up posted prices, and by
mid-April, Group I posted prices at levels of 25-30 cents/gal

AUGUST 2019

| COMPOUNDINGS | ILMA.ORG

entered the market. Group I bright stock posted prices moved
up 35 cents/gal for most producers during this time period.
Motiva moved up its Group III prices by 25-30 cents/gal,
depending upon the viscosity grade, in early April, but other
Group III producers held back on posted increases until
early May.
Group II producers moved up posted prices again in
April, increasing 15-30 cents/gal depending upon the
producer and the viscosity grade.
By mid-May, most Group III posted prices increased
about 25 cents/gal - some producers more, some less,
depending upon the producer and the grade.
Graph 2 shows one Group II producer's posted light- and
mid-grade price direction alongside VGO and LLS crude,
with the key disparity showing at March.
Posted price increases were implemented into the wider
market, given typical contractual discounts and other
options, with market ranges moving up throughout the
paraffinic viscosity grades.
Naphthenic base oils did not miss the pressure, with
increases in the pale oils coming out in March and April.
These increase initiatives also found ready implementation,
depending upon the viscosity grade.
The second half of this year is not showing the price
trends in crude oil or activity in demand that offers much
likelihood that it can copy the first half of the year.
Across the quarters, export spot options sagged, and this
factor is setting a pace for slower base oil prospects during
the second half of the year.
Contracted exports are routinely transacting, but moving spot cargoes slowed in May and has not shown much
refreshing in June.
One reason for this appears to be a lack of understanding
from foreign buyers about the higher base oil prices in the
U.S., with reluctance from some to accept the higher offers
even as sellers are not interested in lowering the offer levels.
Crude oil prices have fallen back into the low $50s/bbl,
and many global economies are not faring well in 2019.
Uncertainties developing from back-and-forth tariff blusters and the realities generated between the U.S. and China
are playing a role in the global conditions. The never-ending
saga of Brexit also is not a helpful aspect.
Speaking at the KPMG Global Energy Conference in
Houston, Rex Tillerson, former U.S. secretary of state, was
asked for his views on U.S.-China trade relations.

http://www.ILMA.ORG

ILMA Compoundings - August 2019

Table of Contents for the Digital Edition of ILMA Compoundings - August 2019