US exports record volumes in 2023, remains reading to supply in 2024 amid weak demand

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US exports in 2023

US exports in 2023

US exports in 2023 – One of the key questions in the US base oils industry as 2024 began was whether domestic demand would rebound from the 40-year low it hit in 2023.

At the time of this writing, the peak consumption season is beginning as the North American spring starts.

Demand data is not yet available from the first quarter, but the market fundamentals do not suggest that demand will return to pre-pandemic levels in the domestic North American market.

For reference, 2022 lubricant consumption was only 0.9% lower than 2019. The trend has been gradually downward since a peak in 1999, but 2023 fell sharply as you will see below.

The expectation for 2024 spring season will not be worse but maybe not better.

Demand may remain lackluster until the economy truly begins its recovery, which ICIS anticipates in fourth quarter of this year.

2023 at a glance

Full-year 2023 production and consumption data were released on March 1.

Lubricant consumption fell 26% year on year, according to the US Energy Information Administration (EIA). ICIS analysts had called for a 19% decline during the PanAmerican Base Oils and Lubricants Conference in December using data through August and without factoring in the impact of Mexico’s strict base oil import legislation that went into effect in late October.

Consumption in November and December was down 50% and 63%, respectively, likely owing to that legislation as Mexico is the US’ top export destination and the primary driver of record US exports last year.

Actual product supplied to the market fell dramatically short of ICIS’ demand forecast model—by 25%–as the model accounts for industrial activity, miles driven, automotive production, etc.

The gap between the model and actual demand observed can be attributed to inflationary pressures causing buyers to commit to smaller purchases as needed rather than stocking up.

By contrast, lubricant production fell by only 5.4% year on year, according to EIA data.

Weak US demand translated to record exports

Because US domestic demand fell so much without any similar adjustments made on the production side, the US was forced to export high volumes of base oil.

The US exported a record volume of base oil in 2023—9% more than the second highest year in 2018, according to ICIS’ Supply and Demand Database.

At the same time, the US exported a record volume to Brazil in 2023—a staggering 88% more than in 2020, according to ICIS’ database. Brazil is the US’ third largest export destination behind Belgium and Mexico.

Mexico also imported record volumes from the US in 2023, topping its previous high in 2019 by 82%. Those exports slowed in October when the Mexican government implemented legislation restricting imports, which should cap volumes to the country going forward.

Brazil import data from ICIS’ database showed a significant increase of 19,1% related to 2022 and a decline of 5.7from a previous high in 2021 o. This could be due to the stop for maintenance of the two main local refineries producing base oil, but the point remains that Brazil is an important trade partner for the US base oils industry, accounting for 72% of Brazil’s imports in 2023. This should remain the case in years to come as demand is not likely to be completely met by local supply.

The US is oversupplied and exporting in early 2024

Market fundamentals through February have suggested that domestic US demand remains weak.

Faced with surplus supplies, refiners sold a slew of export cargoes that left the US during Q1 bound for India, West Africa, Europe and the Middle East.

US export prices sunk lower than VGO feedstock levels on the low end of the range in some cases in the bid to balance the market.

This is unusual in the first part of the year, ahead of what is typically the peak consumption season for base oil in the domestic market. 

Demand seems to be slightly stronger for Group III than for Groups I and II, at least anecdotally. Data are not yet available.

A posted price increase by two producers in February was met with stiff buy-side resistance.

While VGO had increased by 33 cents/gal since the start of the year at the time of the increase, oversupplied conditions and weak demand outweighed this and other producers left prices steady.

There is a growing disconnect between US posted prices, published domestic market prices and spot export prices.

The graph shows the ICIS Group II 100N domestic market and spot export prices compared with an average of the Group II 100N posted prices.

This is the widest the spread between the posted price and ICIS assessed prices has ever been, according to ICIS price history.

US economic rebound not likely until H2

The US manufacturing PMI remained in contraction in January and February, suggesting weak demand, but inventories contracted at a quicker pace.

“The long and deep de-stocking cycle could be ending, with the possibility for re-stocking later this year,” ICIS senior economist Kevin Swift said, adding that although demand remains slow, manufacturing may be at the early stages of recovery.

ICIS projects the US GDP will bottom out in Q2/Q3 with a soft landing most likely, given resilience in the labor market and strong consumer spending. A mild recovery could emerge by late 2024.

ICIS projects slower GDP growth in 2024 of 2.1% after 2.5% in 2023.

The Fed needs more time and data to begin its rate cuts, which are not likely until H2.

Additional reporting by Joseph Chang and Stefan Baumgarten