The base oil market in Asia remained disappointingly slow, despite earlier expectations of a pick-up in demand ahead of the Lunar New Year holidays starting next week.
The holidays, which are celebrated in several countries across the region – particularly in the key market China – will pull numerous players away from their business and result in muted activity.
Suppliers had hoped that the first couple of weeks of 2020 would show increased buying interest from consumers eager to replenish tanks following the December holidays. Both buyers and sellers tend to end the year with lean inventories to avoid tax repercussions, and typically return to the trading scene for fresh business transactions in January.
However, demand during the intermezzo turned out to be less vigorous than expected amid ample supply levels. Suppliers were now turning their attention to the weeks following the Lunar New Year, as some buying interest for February shipment has started to emerge.
Producers were also watching developments on the crude oil and feedstocks side, as values have been volatile, especially following a flare-up of tensions between the United States and Iran.
Crude oil spiked the first week of January, but retreated after the tensions started to cool off, despite unfortunate developments in Iraq. Nevertheless, Brent prices remained above $60 per barrel and base oil producers felt that margins have been squeezed over the last several months.
Increase initiatives emerged in the U.S. base oil market this week driven by similar market fundamentals as in Asia, after almost eight months of steady posted prices. However, whether similar movements would be successful in Asia remained to be seen, as the ample supply and tepid demand weighed on price ideas.
Participants pointed out that supply will begin to tighten as a number of plants have been running at reduced operating rates and some will be embarking on turnarounds in the first and second quarter. At the same time, turnarounds scheduled in Europe at Group III facilities could result in tighter conditions in that region and in attractive opportunities for Asian exports.
It was heard that South Korean producer SK‘s API Group II unit in Ulsan, South Korea, has been running at really low rates or shut down since Q3 2019 and there were no signs that it would be restarted soon. This has not affected the company’s Group III production.
Taiwanese producer Formosa Petrochemical had been running its Group II plant at reduced rates for several weeks, but was heard to have increased run rates and is planning to embark on a routine turnaround at its plant in Mailiao, Taiwan, in June.
In China, there were reports that PetroChina would not be restarting its Group II plant in Daqing, China, until later this year, after idling it in October, given weak market economics. PetroChina’s Group I plant in Dalian, China, was also heard to have halted production due to lean margins this month.
Market players had also been optimistic that the signing of Phase One of a trade deal between the U.S. and China would lead to improved market activity, but experts said that the impact on petrochemicals will be limited during the implementation of the first phase of the deal as tariffs on most products have not yet been removed.
Even though the deal will probably have a positive psychological effect in that tensions between the countries have started to ease, it is still uncertain whether it will benefit sectors such as the automotive industry, which is one of the main consumers of base oils and lubricants.
Another element that both buyers and sellers were keeping an eye on were freight rates, as the implementation of the IMO 2020 regulations, together with the possibility that Iran would continue with attacks or block vessels in the Strait of Hormuz, had triggered speculation that transportation costs would be going up.
Freight rates on certain routes did go up in January, but this was partly due to tightening vessel space, particularly for shipments from the U.S. to Asia. Vessels traversing waters in the Middle East also saw increases in insurance premiums, according to sources, which led to higher indications for base oil shipments originating in that region.
In the meantime, base oil spot prices in Asia were flat as business remained subdued and participants were hesitant to conclude deals during a period plagued with uncertainties, both in terms of economic prospects for the region and demand for lubricants in particular, and ongoing fluctuations in crude oil, feedstock, and transportation costs.
Ex-tank Singapore Group I prices for the solvent neutral 150 grade was unchanged week on week at $680/t-$700/t, and the SN500 was at $730/t-$750/t. Bright stock was assessed at $820/t-$840/t, all ex-tank Singapore.
The Group II 150 neutral and 500N were steady at $720/t-$740/t and $730/t-$750/t, respectively, ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was holding at $540/t-$570/t, and the SN500 grade was heard at $550/t-$560/t. Bright stock was hovering at around $700/t-$720/t, FOB Asia.
Group II 150N was heard at $570/t-$590/t FOB Asia, while the 500N and 600N cuts were gauged at $590/t-$610/t, FOB Asia.
In the Group III segment, the 4 centiStoke and 6 cSt were assessed at $770-$800/t and $780/t-$825/t, respectively. The 8 cSt grade was mentioned at $720-740/t, FOB Asia for fully approved product.
Upstream, crude oil futures steadied on Thursday as the Phase One trade deal between the U.S. and China engendered some optimism in regards to an increase in global crude demand. Under the first phase of the deal, China committed to buy over $50 billion more of U.S. oil, liquefied natural gas and other energy products over two years. However, oil gains were capped after the International Energy Agency predicted that oil production would outpace demand.
On Thursday, Jan. 16, Brent March futures were trading at $64.09 per barrel on the London-based ICE Futures Europe exchange, compared to $65.80/bbl on Jan. 9.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
LubesnGreasesshall not be liable for commercial decisions based on the contents of this report.
Historic and current base oil pricing data are available for purchase inExcel format.