Prices were fairly stable in the Asian base oils market, with participants taking a step back to assess market conditions before starting July discussions in earnest.
Given the turmoil in financial and crude oil markets following the referendum that established the United Kingdoms intention to exit the European Union, both buyers and sellers seemed to have decided to take some time off to observe developments before finalizing base oil deals.
A certain sense of uncertainty over price direction was weighing on market sentiment, with some participants expecting prices to continue on firm footing due to current supply tightness and steep crude oil prices, and others anticipating a gradual weakening of demand and an accompanying decline of base oil values in coming weeks.
Some buyers continued to face difficulties in locating material, given the snug availability of certain grades, in particular the highviscosity cuts in both the API Group I and II segments.
The tight conditions were caused by healthy demand during the spring and summer lubricant production season, low producer inventories upon entering the season, and recent and ongoing turnarounds in the region.
One of the production outages that appears to have had a major impact on the Chinese market – as well as other Asian nations – is the two-month turnaround at Formosa Petrochemical’s Mailiao, Taiwan, plant.
Formosa’s base oil plant in Mailiao can produce 600,000 metric tons per year of Group II products, and the producer typically exports large quantities of base oils to China under contract and on a spot basis every month.
It was heard that Formosa’s base oil plant shutdown was scheduled to coincide with a turnaround at a vacuum distillation unit at the Mailiao refinery, and that the turnaround would last until late August, according to sources.
The turnaround is expected to extend the tight supply/demand situation in the region until September, when Formosa will start rebuilding inventories, and requirements in general are anticipated to be less robust as the busy production season concludes.
In the meantime, consumers and importers in China and neighboring countries have resorted to securing product in other regions such as the UnitedStates and Europe, although buying enthusiasm has started to wane as several large shipments were expected to arrive in late June/early July and were likely to satisfy immediate requirements.
Additionally, spot availability in the U.S. has also dwindled due to substantial export business the previous two months, and a short turnaround at the Excel Paralubes base oil plant in Louisiana further exacerbated the tightening. Production from this Group II facility is jointly marketed by U.S. suppliers Phillips 66 and Flint Hills Resources.
Base oil demand is anticipated to decline as the summer has started and lubricant production will start to slow down ahead of the fall season, but will probably pick up again in a couple of months, sources said.
Lubricant producers in China are concerned that requirements may be weaker towards the end of the year, as the automotive segment may see a decline in sales.
Auto sales in China have shown very healthy growth rates since October 2015, mainly because of the 50 percent tax reduction granted by the government on small car sales (for vehicles with engines smaller than 1.6 liters), a tax break which is due to expire at the end of the year. Nearly 70 percent of Chinas new car sales fall into the category that qualifies for this tax break, according to the Chinese Association of Automobile Manufacturers.
The potential slowdown in China is also a matter of concern to producers in other countries, since conditions there impact prices in other economies. Some Japanese companies have opened blending facilities in China, and are worried that there may be a steep downturn in the automotive industry once the tax break expires.
Japanese base oil prices have inched up slightly as a result of firmer crude oil values, but the increases have been tempered by a strong exchange rate, sources said.
Since the huge crude oil price drop about a year and a half ago, it’s been a difficult market to keep up with, a Japanese supplier noted. But despite the uncertainties and the slowdown seen in many Asian economies, the Japanese lubricants industry registered healthy growth this year, the source added.
Meanwhile, in India, the base oils market has been fairly stable, with values moving up in line with indications in other parts of Asia. Given new capacity coming on-stream in the United Arab Emirates and ongoing Group III production in Bahrain, it was heard that suppliers had been targeting India as a means of expanding market share, with several shipments heard to be scheduled for delivery in the next few weeks.
Crude oil price movements have also commanded attention from base oil buyers and sellers alike. This week, crude futures posted their largest quarterly rally since 2009 due to supply disruptions in Nigeria and Canada, threats of an oil workers’ strike in Norway, and expectations of falling global production.
However, prices fell on Thursday, pressured by returning Nigerian production and expectations that Canadian outages caused by wildfires would virtually end by September.
Brent futures rose 25 percent in the second quarter to $49.68 per barrel on ICE Futures Europe.
ICE Brent Singapore futures closed at $50.46 per bbl in afternoon sessions on July 4, compared to $48.68 per bbl on June 27.
Base oil trading was still lackluster this week, with negotiations for July tonnage starting to heat up, but pricing remaining fairly stable.
On an ex-tank Singapore basis, the Group I solvent neutral 150 grade was assessed at $530/t-$550/t. The SN500 was unchanged week on week at $640/t-$660/t, while bright stock was holding at $1,030/t-$1,050/t.
The Group II 150 neutral was steady at $570/t-$600/t, and the 500N at $750/t-$760/t ex-tank Singapore.
On an FOB Asia basis, Group I SN150 was heard at $450/t-$470/t; the SN500 was unchanged at $610/t-$630/t FOB. Bright stock was also steady at $940/t-$960/t FOB.
In the Group II category, the 150N cut was holding at $540/t-$560/t FOB Asia, while the 500N/600N was heard at $710/t-$730/t FOB Asia.
In the Group III tier, the 4 centiStoke and 6 cSt oils underwent no fluctuations and were gauged at $860/t-$890/t FOB Asia, and the 8 cSt grade was holding at $610/t-$630/t FOB Asia.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
LNG Publishing shall not be liable for commercial decisions based on the contents of this report.