In the first half of the year, the overall domestic base oil market experienced narrow fluctuations, with the price center shifting downwards. From January to June 2024, the average price of domestic base oil 150N (cash in exchange, self pickup, tax included, the same below) was 8651.2 yuan/ton, a decrease of 4.71% compared to the same period last year. based on the monthly average price level of base oil in the first half of 2024, the price of base oil is at a relatively high level in recent years. It is expected that the base oil market will experience high volatility in the second half of the year, and crude oil is likely to have a strong trend in the second half of the year, which is the main driving force supporting high prices. According to seasonal patterns, the high point in the second half of the year is likely to occur in September and October, while the low point may occur in November and December.
2022-2023 Annual Report on China's base Oil Market
In the first half of the year, the overall domestic base oil market experienced narrow fluctuations, with the price center shifting downwards. Its trend is basically consistent with the forecast in the 2022-2023 China base Oil Market Annual Report. From January to June 2024, the average price of domestic base oil 150N (cash in exchange, self pickup, tax included, the same below) was 8651.2 yuan/ton, a decrease of 4.71% compared to the same period last year. As of June 25th, the domestic base oil price of 150N has closed at 8446.67 yuan/ton, which is 0.3% higher than the beginning of the year.
The peak of the base oil market operation in the first half of 2024 occurred on April 17th, with prices reaching 8866.67 yuan/ton. On the one hand, the rise in crude oil provides cost support, and on the other hand, April is the peak season for base oil demand, with blending plants concentrating on procurement, resulting in a high price for base oil. Subsequently, due to the gradual weakening of demand and the easing of expectations of tight international crude oil supply in late April, crude oil prices fell broadly and base oil prices fell. In mid to early April, although crude oil rebounded in stages and base oil prices followed suit, prices entered a downward trend again due to weak supply and demand and crude oil fluctuations, which continued until mid June. In mid June, with the addition of maintenance manufacturers and the expected decrease in resource supply, the price of base oil rebounded slightly.
based on the monthly average price level of base oil in the first half of 2024, the price of base oil is at a relatively high level in recent years. On the one hand, supported by costs, the price of base oil remains high. On the other hand, the production of base oil is low, and it operates at a high level based on sales and production. The price adjustment is lower than in previous years. Overall, the seasonal fluctuation pattern of base oil prices in the first half of 2024 is evident.
Semi annual summary of the base oil market
In the first half of the year, the price of base oil in the market first rose and then fell, with a clear seasonal trend. The average price of base oil is at a relatively high level in recent years, which is directly related to the cost support of crude oil, weak supply and demand, and low profits.
The crude oil price is relatively high, and the cost of base oil is significantly supported
base oil has multiple production processes, but its main source material is crude oil. In the first half of 2024, crude oil fluctuated in the range of 77-87 US dollars per barrel, which provided relatively significant cost support for base oil and to some extent caused high market prices for base oil.
In the first half of 2024, international oil prices first rose and then fell, fluctuating from $70.38 per barrel on January 2 to $86.91 per barrel on April 5, and then falling back to around $77 per barrel. The market price of base oil shows a certain positive correlation with the trend of crude oil. In the first half of the year, base oil mainly rose and then fell, with a smaller range of fluctuations compared to previous years. Refineries determine production based on sales, and the market price of base oil fluctuates narrowly. In addition to cost impact, the weak pattern of supply and demand is also an important reason for the trend of base oil. In terms of supply, there has been no new expansion of base oil capacity since the beginning of this year. In the first half of the year, with relatively stable supply and demand, the supply and demand relationship slightly exceeded the demand. Supported by high costs, market prices mainly fluctuate seasonally, and the range of price adjustments has narrowed.
In terms of production, in the first half of 2024, the base oil production increased, with a total production of 3.4777 million tons, a year-on-year increase of 6.37%. The refinery determines production based on sales, with an average operating load of 43.59%.
In terms of import volume, from January to May 2024, under the suppression of weak demand and the impact of domestic resources, the import volume of base oil decreased compared to the same period last year. According to data from the General Administration of Customs, the total import volume of base oil from January to May 2024 was 729800 tons, a year-on-year decrease of 15.85%. From the monthly import trend, the overall import volume of base oil from January to May showed a trend of first decreasing, then increasing, and then decreasing. February coincided with the Chinese Spring Festival holiday, and downstream demand weakened, resulting in an overall decline in the import volume of base oil; In March, the market's essential procurement volume increased, and the overall import volume rebounded; The onshore cost continued to rise from April to May, coupled with weak downstream demand, resulting in a continuous decline in the import volume of base oil. It is expected that from January to June, the import of base oil will reach 829800 tons, an increase or decrease of 19.71% compared to the same period last year.
Overall, it is expected that the total supply of base oil in the first half of the year will reach 4.3075 million tons, an increase of 0.1% compared to the same period last year. The overall supply growth is not significant and is basically the same as last year.
In terms of demand, the main downstream of base oil is the production of lubricating oil, accounting for 75% of the total demand. Moreover, lubricating oil, as a universal oil in the industry, is a barometer of the national economy. The pace of economic development is slowing down, and the growth rate of demand for industrial lubricants is limited; At the same time, the automotive oil industry has been affected by the rapid development of new energy vehicles, resulting in a certain reduction in demand.
According to the data, the domestic downstream demand for base oil in the first half of the year was 4.3936 million tons, an increase of 0.56% compared to the same period last year, and exports were about 94900 tons, an increase of 24.66% compared to the same period last year. From the current supply-demand relationship, the overall supply-demand relationship of base oil is relatively stable, with supply slightly exceeding demand. To a certain extent, it supports the stable operation of base oil prices, especially in February and March when market demand is slightly better, and the supply-demand relationship is slightly lower than supply, resulting in a slight increase in prices. After April, the market entered a low demand season, with an increase in base oil inventories and increased downward pressure.
High cost and low profit, base oil prices remain high
From May to June, the domestic base oil industry's market equipment profits were mostly in the inverted loss stage. The overall profit trend shows a fluctuating downward trend. In the first half of the year, the average price of hydrogenated tail oil in China was 6579.16 yuan/ton, a decrease of 0.79% compared to the same period last year. The average price of hydrogenated tail oil has been boosted by crude oil and is currently at a high level in recent years. The production cost of base oil remains high, and the bottom support of base oil prices is obvious, with high level fluctuations being the main trend. In the first half of 2024, the theoretical profit of the base oil unit using hydrogenated tail oil as raw material was -48 yuan/ton, while in the first half of 2023, the average profit price of the base oil unit using the same raw material was 1124 yuan/ton. From the perspective of profit level, the current production enthusiasm of manufacturers has been dampened, and production is basically determined by sales.
In terms of import profits, according to data from Zhuochuang Information, the average theoretical profit of Class II imported base oil 150N in the first half of 2024 was 214.43 yuan/ton, a year-on-year decrease of 30.72%. The onshore cost of Class II imported base oil continued to rise in the first half of the year, especially from May to June. The onshore cost of Class II imported base oil was relatively high. Although importers increased their prices based on the onshore cost and shipment situation, import profits still decreased compared to the same period last year, which to some extent supported the high operation of imported base oil prices.
Looking ahead to the second half of the year, the factors affecting the operation of the base oil market will focus on changes in crude oil prices; The boosting effect of the domestic economic recovery process on the demand side, as well as the maintenance process of production enterprises on the supply side, are several aspects.
Strong crude oil operation, high base oil cost
It is expected that international crude oil will show a trend of strengthening in the third quarter and falling in the fourth quarter in the second half of the year. In the third quarter, we will focus on the actual demand performance. If the peak season expectations fall short, there is a significant downward risk in oil prices. In the fourth quarter, with an increase in supply and a decrease in demand, oil prices may reach their lowest point of the year. In addition, the inventory levels of crude oil and refined oil products have significantly rebounded compared to last year, and the "ceiling" above oil prices is likely to be lower than the level in September last year. However, we are wary of geopolitical risks returning to our sight, causing oil prices to surge higher than expected. Overall, the average WTI price for the second half of the year is expected to be $80.14 per barrel, and crude oil remains relatively strong. To provide certain support for the base oil market.
Supply and demand game, market consolidation at high levels
In the second half of the year, there was no new production capacity for base oil, and the overall production capacity was 16.42 million tons. The operating load was low, and there was a serious overcapacity. Due to poor demand, some devices may still have shutdown and maintenance plans, and resource supply enterprises still maintain a sales based production model, resulting in stable market supply. According to the announcement of the State Council Tariff and Taxation Commission on suspending tariff reductions for some products (second batch) of the Cross Strait Economic Cooperation framework Agreement, starting from June 15, 2024, Formosa Plastics base oil will be subject to a tariff of 6%, and the import cost of Formosa Plastics Class II imported base oil will further increase. Under the impact of low-priced domestic resources, it is expected that the import volume will continue to shrink. It is expected that in the second half of the year, the base oil production will be 3.543 million tons, the import volume will be 648200 tons, and the total supply will be 4.1912 million tons, a year-on-year decrease of 0.76%. Reduced supply of base oil resources may support high market prices.
From the demand side, the spontaneous recovery of endogenous momentum in the domestic economy is expected to continue marginal improvement and boost the consumption demand of the lubricant industry and end products, which will be fed back to the base oil market. However, the growth rate of demand is limited, and the supply and demand relationship of base oil remains tight in the second half of the year. The price of base oil market rises or falls during the phase transition of supply and demand relationship. According to statistics from Zhuochuang Information, the expected demand for base oil in the second half of the year is 4.153 million tons, a year-on-year decrease of 4.09%. In the state of reduced demand, the upward space of the base oil market is limited.
The downstream lubricant industry has entered a mature stage, and due to the high price of base oil, the main factor is the low purchasing enthusiasm of manufacturers for raw materials, with a focus on on-demand procurement. At the same time, in the context of the general profitability of the lubricant industry, the ability of downstream factories to accept the price of base oil may not have a significant improvement.
The price of base oil has obvious seasonal characteristics: the highest probability of increase in September and October
The fluctuation of base oil prices has certain seasonal characteristics. From March to April and September to October each year, the demand for base oil in the market starts, and the probability of an increase is high. Especially in September and October, the probability of an increase due to the support of the peak consumption season reaches 90%. The base oil gradually enters the off-season of consumption from November to December, and the probability of market decline is high (see Figure 4). From the perspective of the market situation in the first half of the year, the base oil has been operating at a high level and the frequency of price adjustments has decreased. However, under the supply and demand game, the seasonal trend of the market is still obvious. At the same time, the supply and demand pattern of base oil remains unchanged in the second half of the year, with high costs. The trend of base oil in the second half of the year is likely to follow the seasonal fluctuation pattern.
It is expected that the base oil market will experience high volatility in the second half of the year, and crude oil is likely to have a strong trend in the second half of the year, which is the main driving force supporting high prices. In addition, the seasonal peak consumption season in September and October is also expected to provide support for prices. Considering the supply and demand relationship, it may drag down the upward space of prices. From November to December, due to the seasonal consumption off-season, base oil prices may experience a certain downward trend. It is expected that the mainstream price range of base oil in the second half of the year will be between 8400-9200 yuan/ton. According to seasonal patterns, the high point in the second half of the year is likely to occur in September and October, while the low point may occur in November and December.
