US base oil prices are set to hold firm at least during the first few months of 2021 in response to strong supply-demand fundamentals.The continuing price strength follows a year when US base oil prices were mixed. Prices firmed in the first quarter of the year. Supplies remained limited because of a heavy round of stocks clearing in the fourth quarter of 2019 and planned and unplanned maintenance.
Prices then fell in March and April. Supplies built because of reduced demand during the Covid-19 lockdowns. Tighter supplies because of widespread refinery production run cuts and unplanned maintenance then supported higher prices in the second half of 2020.
Postings hikes start, end 2020
The year 2020 started and ended with a round of producer posted prices increases. The moves reflected tighter supplies at a time of year when supplies are typically more plentiful and demand seasonally weaker. Producers raised their postings between $0.20-0.30/USG in January 2020 and again in December.
Planned and unplanned refinery maintenance at several US Gulf coast refineries in the first quarter kept supplies tight. The price hikes prompted an earlier than usual start to the spring buying season as blenders sought to get ahead of the price increases. Base oil producers then cut their postings by $0.70-1.00/USG in March to early April during the near nationwide Covid-19 lockdowns.
US refiners responded to the demand destruction by reducing the run rates of most units including their base oil plants. This helped to bring the market back into balance as lower production matched reduced demand.
Run cuts stay in place
The production run cuts remained in place for the rest of the year. But demand began to recover when lockdown measures were lifted in the summer.US supplies then struggled to meet the increased domestic and export demand. Some refiners were able to boost production in the second half of the year. But many of them were unable to respond in a similar way because of the weak fuels demand and margins. This kept base oil supplies tight and margins unusually firm throughout the year.
The persistent supply tightness lifted base oil margins to an eight-year high in November. The Argus domestic spot US Group II N100 premium to four-week average vacuum gasoil prices averaged $0.60/USG in 2020, its highest level since 2017.
The unplanned and extended shutdowns of two major US Gulf coast (USGC) Group II refineries in the third quarter exacerbated the supply tightness. The refiners were shut after category 5 storm Hurricane Laura hit southwest Louisiana in late August. The tighter supplies provided a further boost to spot pricing in the domestic and export markets during the third and fourth quarters of the year.
US refiners failed to catch up with the increased export demand and steady domestic demand in the final months of 2020 following the extended unplanned shutdowns.The persistent supply tightness raised expectations that another round of producer posted prices increases will take place in early 2021.
Export demand outpaces domestic demand
Domestic demand lagged rising export demand in the second half of the year. Reduced production in key export outlets in Latin America and the Mideast Gulf boosted demand in these regions for any excess US supplies.
Domestic demand remained weaker than usual after recovering during the summer months following the lockdowns in the spring. Activity in many parts of the country did not return to normal as the pandemic continued to spread. Many schools remained closed and people continued to work from home. These lifestyle changes curbed demand for fuels and lubricants.
Pricing dynamics among the various grades and groups also changed in 2020. The firmer export demand prompted export prices to rise to a premium to domestic prices. Argus export spot US Group II prices flipped to an unusual premium to domestic spot prices from September through to the end of the year.The domestic US market is typically firmer than the spot export market.
The last time that spot export prices were higher than term contract prices was in the final months of 2017. That was when Hurricane Harvey hit southeast Texas and shut two key USGC refineries for the remainder of that year. It was the first time since Argus began assessing domestic spot prices for US Group II base oils in 2011 that prices flipped to a discount to export prices. The pattern repeated itself in 2020 but for even longer.
Export demand for Group I heavy grades rose in the final months of the year, especially in Latin America. The stronger demand supported a rise in export prices for heavy neutrals and bright stock on an outright basis and relative to domestic prices.
The Argus domestic spot US Group I bright stock price premium to export spot prices narrowed to just $0.03/USG by the end of December 2020. The premium was down from $0.55/USG at the end of December 2019 and the lowest since May 2011. Argus domestic spot US Group I bright stock prices ended the year just slightly higher than at the end of the previous year. Bright stock export prices were $0.55/USG higher than at the end of the previous year.
Exports, imports fall
Some key market trends that developed in recent years persisted in 2020, such as lower US paraffinic base oil production and domestic demand. New trends emerged in response to the weaker global supply-demand fundamentals with the continuing pandemic. US base oil exports and imports fell in 2020. Imports had reached a record high just a year earlier.
A drop in imports of premium-grade base oils in 2020 helped keep supplies balanced to tight. Demand for Group III supplies recovered more quickly than Group II after lockdowns were lifted during the second quarter.
Tighter supply-demand dynamics then helped boost Group III prices in the second half of the year. Argus domestic spot US Group III prices ended the year $0.35-0.36/USG higher than at the end of December 2019. Group III prices also widened their premium to Group II prices. The Argus domestic spot US Group III 4cst premium to Group II N100 averaged $0.88/USG in 2020, up from $0.66/USG in 2019.
Naphthenic base oils slip in 2020
US naphthenic base oil prices trended lower in 2020. Domestic prices fell in the first half of the year as supply and demand weakened during the Covid-19 pandemic.
A heavy round of plant maintenance and extended turnarounds in the first half of the year kept surplus supplies balanced. Prices then recovered in the third quarter and stabilised in the final quarter of the year. Both domestic and export spot prices ended the year at lower levels than the previous year.
The domestic price premium to export prices narrowed. The trend reflected the firmer export demand and tighter supplies in key export outlets in Latin America and Europe. The Argus domestic spot US pale oil 60 premium to export prices averaged $0.28/USG in 2020, down from $0.40/USG in 2019.
Export demand for US naphthenic supplies increased in 2020 following the closure of a key export producing refinery in the USGC at the end of 2019. Feedstocks and production issues and legal ramifications from US sanctions on Venezuela also affected a key European naphthenic producer in the first half of the year. This prompted more buyers in Europe and Latin America to turn to US producers for supplies.
Domestic demand for naphthenic base oils was more consistent than paraffinic base oils through the lockdowns in the spring and in the second half of the year. Several producers were able to increase their sales volumes in 2020 in the final months of the year. Tighter paraffinic supplies boosted demand among these blenders with the flexibility to use pale oils instead.
Naphthenic base oil margins weakened in 2020. The trend reflected weaker supply-demand fundamentals during the continuing pandemic. The pale 60 premium to four week-average WTI crude prices averaged $53.34/bl in 2020, down from $57.96/bl in 2019. The pale 60 premium to four week-average Light Louisiana Sweet crude prices averaged $51.66/bl, down from $52.08/bl in 2019. The pale 60 premium to four week-average Brent crude prices averaged $49.56/bl, down from $50.74/bl the previous year.