Report on Base Oil Prices in the United States

As we approach the Labor Day holiday with the summer driving season coming to a close, the United States base oils market has entered a period of relative calm. However, beneath this seemingly tranquil surface, there are subtle shifts taking place as the supply of specific grades tightens. Several suppliers have recently executed numerous export transactions, putting pressure on domestic supplies and causing prices to surge. In early August, price hikes of 20, 25, and 30 cents per gallon were announced and have since been widely put into effect, with some spot prices also showing upward movement. Contract prices have risen for the majority of buyers, and it is apparent that spot prices are following suit. This trend is particularly noticeable in the light and mid-viscosity base oils segments, where supply constraints have become more pronounced. According to our sources, spot prices for these grades have inched up by approximately 5 cents per gallon. These tightened conditions can be attributed to various factors, including plant turnarounds, a shift towards increased diesel production at the expense of base oil output, and a surge in export activity. Rising diesel prices have led refiners to reconsider their feedstock allocations, resulting in more vacuum gas oil being diverted into the fuel production stream. Chevron's API Group II and Calumet's Group I and Group II facilities have recently wrapped up their maintenance turnarounds. However, there's a Group II refinery that has scheduled a short turnaround for the upcoming week, while a Group I producer is gearing up for an extended maintenance program set to kick off in September. Motiva was reportedly engaged in a brief planned maintenance shutdown at its Port Arthur, Texas, plant, which encompasses both Group II and Group III base oil production units. This shutdown, set to affect only one of the plant's three base oil production lines responsible for Group II 600N, had been anticipated and was unlikely to cause any significant market impact, according to insider sources. As Motiva generally refrains from commenting on its operational activities, there was no official confirmation from the company regarding this maintenance. HollyFrontier, on the other hand, is gearing up for an extensive 45-day maintenance turnaround at its Group I facility in Tulsa, Oklahoma, scheduled for next month. In preparation for this, the producer has abstained from offering spot cargoes in order to bolster its inventories. Additionally, HollyFrontier has been allocating a larger portion of its base stocks for in-house lubricant production. There have been reports of a few suppliers maintaining limited stock levels, causing some concern among consumers, especially as the peak of the hurricane season approaches. Any supply disruptions along the U.S. Gulf Coast, home to several base oil plants, could potentially lead to product shortages. Recent weather events, such as Tropical Storm Harold in South Texas and the expected landfall of Hurricane Idalia in Florida, have already prompted evacuations, airport closures, and power outages in affected areas. In terms of export activities, U.S. base oil producers seem to be focusing on South American markets, with several cargo deals being finalized for shipment to Brazil, Argentina, and the South American West Coast. Brazilian buyers have shown strong interest in U.S. cargoes due to maintenance activities at their own plants in the fourth quarter. However, there have been no reports of new shipments to South Africa, despite competitive pricing in the past. Unlike the previous year, when many U.S. cargoes found their way to India, this year's exports have remained more regional due to favorable pricing and logistical considerations. The arbitrage from Asia to deep-sea destinations in Latin America also appears to be closed for now, with supply in the Asian region tightening. Reports suggest that Mexican buyers have displayed a sluggish buying interest, resulting in fewer cargoes being shipped to the neighboring country. Mexican buyers seem to be postponing purchases in hopes of securing more attractive prices in the fourth quarter, a period when many U.S. suppliers typically reduce their stocks. The tightening supply of Group I and Group II light-viscosity products in the U.S. has supported current price indications, with suppliers showing reluctance to lower prices. Nevertheless, some importers have started building inventories in anticipation of ongoing price increases and increased demand in the coming weeks. While Group III base oil availability remains ample in the U.S., prices have appeared to stabilize. The market dynamics for traditional Group III imports from South Korea and the Middle East are changing, thanks to increased domestic production and Middle East imports from a previously non-merchant market seller. To avoid oversupply, Group III producers may consider trimming production rates in the coming months. Moreover, additional Group III production expected to come online in India in the fourth quarter may further contribute to an oversupply of global Group III supplies. Naphthenic base oil prices have remained stable, with some spot indications showing slight increases due to firming crude oil and feedstock prices compared to two months ago. Producers are closely monitoring market conditions and crude oil values to determine whether any general price adjustments are needed. Some refiners are also contemplating reducing base oil production rates to focus more on diesel and other fuels, given improved profit margins. The current price structure is supported by a balanced-to-tight supply and demand situation, with consistent demand for most naphthenic oils. Demand for lighter grades, particularly for transformer oil and metalworking fluids, has remained robust. The recent uptick in base oil prices has led to speculation that lubricant blenders may consider raising their prices as well. Although there have been murmurs of a major manufacturer contemplating contract price revisions in September, no official announcements had been made as of the publication deadline. Independent lubricant manufacturers are also evaluating the market and discussing potential price adjustments, albeit cautiously, as lubricant demand has not been exceptionally robust, and many suppliers are keen on protecting their market share. Additionally, there have been no reports of new announcements regarding additive prices. In the upstream sector, crude oil prices saw a significant increase of over a dollar per barrel on Tuesday. This occurred despite concerns about potential U.S. interest rate hikes that could impact oil demand. The rise in prices was supported by a weaker dollar following reports of a softening labor market and expectations of potential supply disruptions stemming from Hurricane Idalia, forming off the U.S. Gulf Coast. As of August 29, West Texas Intermediate (WTI) October futures settled at $81.16 per barrel on the CME, compared to $80.35 per barrel for September futures on August 22. Similarly, Brent futures for October delivery settled at $85.49 per barrel on the CME on August 29, up from $84.03 per barrel on August 22. Louisiana Light Sweet crude wholesale spot prices were recorded at $82.90 per barrel on August 28, down from $83.71 per barrel on August 21, according to data from the Energy Information Administration.