The ongoing base oil supply glut, together with thin margins, were driving Asian producers to reduce operating rates and increase fuel production, as the current situation was not expected to improve overnight.
Both South Korean and Taiwanese producers were heard to have trimmed operating rates given the high production costs of base oils and the softening price of most cuts.
An API Group II/III producer in South Korea has opted for increasing its output of diesel due to better margins, a source familiar with the company’s operations said, while in Taiwan, Formosa Petrochemical has cut back operating rates at its Group II base oils plant.
The length in supply is not a phenomenon that affects only Asia, but also Europe and North America, particularly towards the end of the year when demand tends to decline. A vast number of base oil plants are running below capacity, with global operating rates averaging 75 percent, an industry expert noted at the ICIS Pan American conference in Jersey City, New Jersey, this week.
Additionally, in preparation for the implementation of the IMO 2020 regulations, at least one Asian producer was heard to have started to blend base oils with fuel oil and store its product to meet the expected growth in demand for low sulfur gas oil at the port of Singapore.
Another consequence of the IMO 2020 rules implementation was that freight rates have been going up, as ship operators and brokers were adding a surcharge to cover the additional costs involved.
Aside from the ample supply, activity in the base oils and lubricants segment was dampened by economic uncertainties about the near-term performance of the different segments served by the industry. The automotive sector, for instance, has suffered a slowdown due to the ongoing trade dispute between the United States and China, and this has resulted in reduced demand for Group II and III base oils, according to sources.
The industrial segment is also reflecting a decline, impacting demand for Group I cuts, although bright stock supply seemed to be quite balanced against demand given the more limited number of suppliers offering this grade.
While there were optimistic signs that progress was being made towards a resolution of the U.S.-China trade frictions, they were still affecting trade and manufacturing rates, not only in the two countries involved, but also in other nations geographically as far removed as Brazil.
Base oil and finished lubricants demand in China has weakened since the dispute started more than a year ago, and this, together with the startup of new local base oil plants, has resulted in reduced requirements for imports. This means that traditional suppliers to China, such as South Korean and Taiwanese producers, have had to find new outlets for their products, which is quite a challenge as most regions are well supplied.
Some regional suppliers have found takers in India, where demand was still comparatively steady, but the ample availability of product was driving prices down. Furthermore, India was also attracting barrels from other regions, with a couple of shipments of U.S. base stocks expected to reach Indian shores this month.
Trading was largely subdued in Asia this week, reflecting the traditional slowdown ahead of year-end, as buyers try to finish the year with low inventories and prefer to buy the minimum amounts necessary to run their day-to-day operations. Spot prices remained exposed to downward pressure, but firm crude oil prices offered some support to prevailing price ranges.
Ex-tank Singapore Group I prices for the solvent neutral 150 grade were steady at $680/t-$700/t, and the SN500 was at $730/t-$750/t. Bright stock was holding at $820/t-$840/t, all ex-tank Singapore.
The Group II 150 neutral and 500N were heard at $720/t-$740/t and $730/t-$750/t, respectively, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was assessed at $540/t-$570/t, and the SN500 grade was hovering at $550/t-$560/t. Bright stock was stable at around $700/t-$720/t, FOB Asia.
Group II 150N was assessed at $570/t-$590/t FOB Asia, while the 500N and 600N cuts were hovering at $590/t-$610/t, FOB Asia.
In the Group III segment, the 4 centiStoke and 6 cSt were heard at $770-$800/t and $780/t-$825/t, respectively. The 8 cSt grade was steady at $720-740/t, FOB Asia for fully approved product.
Upstream, crude oil futures lost some of the territory gained earlier in the week as OPEC and other oil producers agreed to one of the largest output cuts of the decade to avoid a supply glut and weakening prices. However, the cuts would only be implemented during the first quarter of 2020, and the OPEC+ would meet again in March to consider an extension of the cuts, several media outlets reported. The new, lower quota would only be applied if all participants adhere to the cuts, which has been a challenge so far.
On Thursday, Dec. 5, Brent February futures were trading at $63.51 per barrel on the London-based ICE Futures Europe exchange, compared to $64.48/bbl for January futures on Nov. 27.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
LubesnGreasesshall not be liable for commercial decisions based on the contents of this report.