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August 2, 2019

Volume 7 Issue 8

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Asia Base Oil Price Report

Rising base oil inventories and lackluster demand continued to affect pricing and business in Asia, with a number of producers looking at opportunities in other regions to mitigate some of the pressure.

However, participants reported that most base stock segments were well-supplied in Europe and North America – the two main target areas for Asian exports – and suppliers were therefore exploring other options such as South America.

Demand in Brazil showed a significant improvement during the first half of the year, compared to the previous year, but it seems that it has since fallen off slightly. However, with the summer in the Southern Hemisphere just around the corner, and lubricant manufacturers starting to prepare for the busier driving season, suppliers were hopeful that new export opportunities would present themselves.

Base oil and lubricant production in Brazil has also been affected by socio-political turmoil, and there are currently discussions that the government is considering the sale of several state-owned refineries, including two base oil plants (for more details, see “Brazil Selling Refineries with Base Oils,” in the July 31 edition of Lube Report Americas).

Mexico and Argentina were also seen as potential markets for exports, but many United States producers already have regular contract business set up in those countries and are likely to protect their market share. Nevertheless, there were rumblings that a Middle East supplier was looking at opportunities in Mexico, since the producer’s exports into China have diminished slightly over the last couple of months.

The relatively fresh inappetence of Chinese buyers for imported base stocks stems from the start-up of several new base oil units in the country.

While it may take some time for the local products to obtain approvals and gain acceptance in the Chinese market, and for the new plants to run smoothly and attain full operating rates, it was heard that the added capacity was affecting established trade exchanges with regional suppliers from Taiwan, South Korea and Singapore, and deep-sea suppliers such as Russia and the U.S. “What is especially alarming is that China’s new [API] Group II and Group III refineries will make this a permanent situation,” a source noted.

Regional producers have reacted to the oversupply conditions and thinning margins by trimming operating rates. It was heard that ExxonMobil was running its Group II production line on Jurong Island, Singapore, at 80 percent since early July, and producers Formosa in Taiwan, and Hyundai Shell and S-Oil in South Korea had reportedly cut run rates by at least ten percent, although there was no producer confirmation forthcoming. Sources said that they would be very surprised if the rates had not been adjusted at these plants.

Oversupply conditions were expected to continue weighing on trade opportunities and prices in the near future. Base oil and lubricants producer S-Oil predicted in an earnings report last week that demand would begin to catch up to supply in 2020 and 2021.

Unless a major unexpected event were to happen, the imbalance will continue to impact the global base oils business, sources said.

“In 2017 the market was almost as oversupplied as it is in 2019, but in 2017 the Shell GTL plant went down, there was a big fire at the Wakayama refinery and the hurricanes devastated the U.S. Gulf. Prices soared,” a source commented.

The base oil producers who are most affected by the slowdown in demand and the supply overhang are those that do not have integrated operations where they can provide base stocks to their downstream lubricant operations, sources said.

Meanwhile, activity in India was expected to regain some of its strength, following the end of the monsoon season, and indeed there were reports of discussions about upcoming shipments from the U.S. and the Middle East. Group I supply in India has tightened as imports from Iran have been thwarted by international sanctions on Iranian exports and financial transactions, and Indian buyers were heard to be on the lookout for alternative sources of product.

Asian spot base oil prices remained exposed to downward pressure due to the current long supply conditions and fluctuating feedstock values, but numbers were largely unchanged as August shipments discussions got underway.

Ex-tank Singapore Group I prices for the solvent neutral 150 grade were holding between $740-$760/t, while the SN500 was at $790/t-$810/t. Bright stock was assessed at $880/t-$900/t, all ex-tank Singapore.

Group II 150 neutral was notionally adjusted down by $10/t to $770/t-$790/t, while the 500N was also assessed down by $10-20/t to $780/t-$800/t, ex-tank Singapore.

On an FOB Asia basis, Group I SN150 was holding at $610/t-$630/t, and the SN500 grade was heard at $600/t-$620/t. Bright stock was hovering at $770/t-$790/t, FOB Asia.

Group II 150N was heard at $590/t-$610/t FOB Asia, while the 500N and 600N cuts were assessed down by $10 at $600/t-$620/t, FOB Asia.

In the Group III segment, the 4 centiStoke grade was holding at $800-$830/t and the 6 cSt at $820/t-$865/t. The 8 cSt grade was gauged at $710/t-$740/t, FOB Asia for fully-approved product.

Upstream, crude oil dropped the most in four years after U.S. president Trump imposed new tariffs on China, which fueled concerns of a global slowdown. West Texas Intermediate futures fell by around 8 percent from the previous session on Thursday.

Brent October futures were trading at $61.10 per barrel on the London-based ICE Futures Europe exchange on August 1, and were hovering at $63.25 for September futures on July 25.

In related news, the Chinese oil and gas sector is now officially open for foreign participation without a requirement to form joint ventures with local companies, OilPrice.com reported. The country intends to open up a range of industries as per a pledge it made during its continuing trade dispute with the United States. The Chinese National Development and Reform Commission announced it would remove the joint venture requirement for oil and gas projects along with a rule stating that only local firms can control gas networks in cities with populations of over half a million people. 

Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com. 

Lubes’n’Greases shall not be liable for commercial decisions based on the contents of this report.