The US base oil market in the first half of 2022 is expected to face increased tightness, higher prices and logistics challenges stemming from supply chain disruptions.
Several turnarounds at key Group II plants in the US Gulf coast were scheduled for the first quarter of 2022 and were subsequently delayed until at least May and possibly into the third quarter. The turnarounds involved catalyst changes at the base oil units.
Several refiners have been unable to secure delivery of catalysts because of various supply chain disruptions, pushing back the dates for 2022 turnarounds. The delays in catalyst changes could lead to lower operating rates and tighter supplies from those refiners.
Tighter supply of Group II base oils could be balanced by tighter supply of base oil additives. Difficulties with sourcing feedstocks throughout 2021 kept additive supply tight and limited the production of finished lubricants.
Continued disruptions to supply chains are expected to keep additive supplies tight in the first half of 2022. Sales controls and allocation levels from 2021 will extend into the first half of 2022, several blenders have been told.
Base oil and finished lubricant supplies also faced disruptions in 2021 from shortages of packaging materials as well as trucks and drivers for deliveries. Those challenges are also expected to continue into 2022.
Blenders faced rising costs in 2021 from base oils and additives. US base oil producers raised their posted prices during the year five to seven times, mostly in the first half of 2021. Several additive producers raised prices twice in 2021.
This prompted an unprecedented amount of finished lubricant price increases for 2021 and is expected to keep margin pressure on blenders into 2022.
With blenders working to implement price increases, there was little pressure on base oil producers to lower posted prices or grant temporary voluntary allowances at the end of 2021. That trend could continue in 2022 as blenders are focused on passing along higher costs in their finished lubricants.
Base oil margins over feedstock low sulphur vacuum gas oil (VGO) started declining in September, while margins over US Gulf coast diesel started declining in August. Those margins remained above year-earlier levels, supporting continued high rates of base oil production.
Global demand for US base oils is expected to remain soft in the first half of 2022. Exports to the key outlet of Mexico are expected to be curtailed by high inventories at the start of 2022 and weaker demand. Some of the demand weakness is tied to reduced automotive production in Mexico due to shortages of key electronic and computer components, again because of supply chain disruptions.
Other key outlets are expected to pull back from US base oils because of growing concerns about the Omicron variant of Covid-19 and rising freight costs limiting arbitrage opportunities.
