Asia Base Oil Price Report（AUGUST 16, 2019）

Despite fairly subdued trade conditions, the base oil market in Asia experienced a tumultuous week, given political and economic developments on the world stage.

 

Crude oil futures crashed on Wednesday as the Dow tumbled 800 points – foreshadowing a possible recession – while weak economic data out of China, together with crude oil inventory gains in the United States unnerved oil markets. Economic data released by China showed a sharp decline in industrial output growth to a 17-year low, media outlets reported.

 

West Texas Intermediate crude fell more than 5 percent after registering significant gains on Tuesday, while Brent crude also performed poorly, with the global benchmark falling $2.96 per barrel (down 4.8 percent) to below $60/bbl, at $58.34.

 

The oil market had seen a huge gain on earlier news that the U.S. was delaying tariffs until December for some of the Chinese exports that had been expected to go into effect in the beginning of September.

 

On Thursday, August 15, Brent October futures were trading at $58.15 per barrel on the London-based ICE Futures Europe exchange, and were hovering at $57.75/bbl on Aug. 8.

 

The ongoing trade war between the United States and China continues to impact not only the economic performance of the two countries directly involved in the dispute, but many other nations as well. Countries further removed from the dispute such as Germany – the fourth largest economy in the world – have seen a contraction in the second quarter as a result of the ongoing trade dispute.

 

Germany relies heavily on exporters that sell large amounts of goods to China and the United States, and one of the segments that is most exposed to the slowdown caused by the trade war is the automotive industry. Weak global auto sales have impacted Germany's car manufacturers, and this, added to the pressure from a disruptive Brexit, are pulling the country's economy down.

 

Other countries with more direct ties to the U.S. and China, such as Mexico, Indonesia, Taiwan and South Korea, have also been impacted.

 

Within the base oil market in particular, South Korean base oil producers have been hit both by weakening demand in China due to the trade dispute and the additional tariffs imposed on Chinese exports to the U.S., and by the start-up of a number of domestic base oil plants.

 

South Korean API Group II and III base oils exports to China have declined over the last several months, and they are likely to continue falling, market sources said, although the economic slowdown in China may be temporary and the situation may improve with a resolution to the trade dispute.

 

Nevertheless, the addition of local base oil supply from the new refineries has allowed China to rely less heavily on imports. The new product is being sold at very attractive prices, which makes it hard for imports to compete, sources noted.

 

Another factor that is impacting South Korean exports into China and India is the increase in base stocks exports from the Middle East. India, in particular, has been a target for Middle East products given easier logistics and a growing need for higher performance base oils.

 

While a rationalization of Group I plants has been taking place in most regions for the last few years, some Group II plants are now also exposed to the possibility that it may not be economically feasible to continue running them at full rates. "It is not too far a stretch to predict that some of the weaker Group II refineries will be faced with closure in the coming years," an industry insider commented.

 

Indian market activity and logistics were also dampened somewhat by severe weather conditions, as two deadly storms struck several countries in Asia. Heavy monsoon rains in India caused devastating landslides and floods, while in China, torrential downpours from Typhoon Lekima also devastated coastal areas, CNN.com reported.

 

Spot trade in Asia was described as lackluster, with prices exposed to downward pressure due to ample availability of most grades, competition among producers and weaker feedstock values. The ranges portrayed below have been notionally adjusted down to reflect current conditions, discussions and price trends, although reports of concluded deals were not forthcoming.