Russian sanctions have lasting impacts on US supply, prices
US base oils markets enter the winter in a balanced-to-long position, as operating rate reductions are offset by slower-than-usual consumption amid lubricant additive shortages and economic concerns.
Three major Group II producers have outages between Q4 2022 and Q2 2023, according to the ICIS Supply and Demand Database.
Additionally, ICIS expects that refiners will prioritise gasoil production over base oils production to meet strong distillate demand in the wake of global sanctions on Russian oil products.
These factors should limit surplus supplies and potentially tighten the market during the Q1 restocking period ahead of the summer driving season.
Strong restocking is expected in the new year despite ongoing lubricant additive supply limitations, which weigh on consumption.
For Latin American markets, reduced base oil rates could mean that the US may not have typical excess stock levels for export in Q1. If US suppliers do have stocks, they may be willing to compete with Asian suppliers on price.
Base oils prices are likely to be supported if distillate demand remains strong as expected and diesel prices remain firm.
Group III prices continue to face pressure from high freight and storage costs, as most US Group III is imported.
Potential for a US recession looms, which could dampen lubricant demand.
The ICIS leading business barometer (LBB) fell for the eighth consecutive month in October - down 7.2% from its peak in February and well beyond the 3% threshold that signals a recession.
The economy continues to struggle with high inflation, a stronger dollar, lingering supply-chain bottlenecks and tight labour, ICIS senior economist Kevin Swift said. "Uncertainty about the future is very high due to tightening Federal Reserve policy, the war in Ukraine and elevated input costs."
Uncertainty about the future is very high due to tightening Federal Reserve policy, the war in Ukraine and elevated input costs.
Russia sanctions and economic uncertainty create opposing risks
The two current key drivers for the energy market, the Russian invasion of Ukraine, and associated sanctions on oil and gas, and the threat of a global macroeconomic crisis, continue to loom just as heavily over the base oil market as the more major refined products.
While lack of supply from Russia of base oils, is some impact on the market, the more significant driver has been the lack of gasoil, which has resulted in many refiners (particularly in Europe) optimising production towards gasoil, often at the expense of base oils.
This has led to tight base oils markets this year. ICIS sees this trend continuing, as the winter and a lack of Russian natural gas supply drives up oil demand as a substitute, keeping markets tight globally.
The potential macroeconomic issues though, could dampen this demand and a widespread downturn is also likely to hamper base oils demand, giving a chance of the markets going long again. However, ICIS sees the former as the more prominent scenario at this stage and tight markets are likely to persist.
The ICIS supply and demand balance sees both Group I and III remaining short globally for 2023, albeit to a lesser extent than this year. Group II will remain balanced to long on the back of further capacity growth in Asia.
For the American markets, this means much the same in 2023 as 2022, although with a little relief for buyers as the markets are generally less tight than 2022. For American suppliers, while margins will ease a little, the high cost of production in Europe, due to energy costs, will help prevent them slipping too far.
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The Authors:
Amanda Hay has seven years of experience writing about and analysing US energy and petrochemical sectors. She has covered everything along the supply chain from the well-level productivity of US tight oil plays to pipeline infrastructure to the petrochemicals and refined products that make modern life possible. Amanda covers base oils and butadiene markets whilst helping to lead the ICIS Americas pricing team as Deputy Managing Editor.
Michael Connolly is the Principal Analyst, Refining, in the ICIS Analytics business covering the Refining industry and Oil markets. His role includes Supply/Demand database forecasting, price forecasting, analysing trends in refining and single client work. He has worked in the refining sector since 2001, both as a consultant and in refineries themselves.
16th ICIS Pan American Base Oils and Lubricants Conference
Training: 29-30 November 2022
Conference: 1-2 December 2022
Hyatt Regency Jersey City
The event will discuss the major themes affecting the market. Sustainability, electrification, supply chain and the Latin American market will all be covered.
There will be multiple networking opportunities for you to reconnect with old friends and make new business connections. Included in the ticket is the drinks reception at the end of day one, where everyone is invited for informal networking and free drinks. Feedback from our conferences this year has told us that it “makes a big difference meeting people face-to-face” and that attendees are “very excited to meet and create a personal connection”.
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