FocusRising crude oil prices pressure US base oil market

19 July 2013 22:10  [Source: ICIS news]

Rising crude oil pressures US base oil marketBy Judith Taylor

HOUSTON (ICIS)--Rising crude oil prices and wider vacuum gas oil (VGO) spreads to benchmark West Texas Intermediate (WTI) crude are putting pressure on the US base oil market.

Group I base oil producers are tracking the upward trend in crude oil prices, comparing the higher costs on the feedstock with steady, but routine, domestic demand in the key motor oil and lubricant end-use sectors.

Suppliers said the approximate gain in crude oil prices over the past month is about $10/bbl (€7.60/bbl), but mentioned that the VGO premiums are getting wider.

VGO premiums to WTI were in the upper $20s/bbl early in the second quarter, but moderated back to the low $20s between June and July, going into the third quarter.

However, the day-to-day movements in VGO prices have been edging up, pressuring up the overall premium assessments by mid-July.

VGO premiums this week were assessed at $20/bbl over WTI for low sulphur material and $17.50/bbl over WTI on high sulphur product.

While the overall premiums were unchanged from the same time the previous week, daily premiums on both grades were on the upswing at about 6 cents/gal out of the per-barrel calculation.

The tension between upward price pressure on paraffinic base oils, particularly the Group I tier, and routine demand is the pivot point.

US posted prices in the Group I tier last changed in March 2013, going down 16-18 cents/gal on light and mid viscosity grades and up 10-20 cents/gal on heavy vis grades in a mixed price move that primarily revolved on demand. 

The Group II base oil tier saw mixed posted price changes between March and May, wherein some light grades moved up as much as 25 cents/gal, while mid viscosity materials moved down by 10 cents/gal for some suppliers and heavy grades either moved up for some suppliers or were unchanged by others.

One supplier moved up all its Group II grades by 15 cents/gal in March, while others were mixed as aforementioned.

Posted prices have remained unchanged from May to July. But now suppliers are beginning to weigh in on the rising feedstock cost versus the mixed demand factor. 

Spot prices recently dipped by about 5 cents/gal in a number of Group I base oil grades, shifting lower mostly because of stable, but not impressive, US demand.

The seasonal April/May uptick in demand for key end-use motor oils and other lubricants was slow to begin and more gradual across the active months than traditionally occurs.

One reason for this that is discussed in the base oils market is that US economic recovery has also been gradual, but has steadily shown improvement.

Depending upon the supplier, July base oil sales are described as steady, with some even saying they are slightly improved from June.

However, this is also said to be a factor of buyers moving into the market for requirements ahead of potentially higher prices on the base stocks as the rumble about increases is beginning to filter into the market.

Another reason for sagging prices in the light and mid vis grade paraffinics is increased use of naphthenics in blending formulations and wider use of Group II and/or Group II+ to bring formulations to desired specifications by using more light viscosities.

Also referred to as Pale oils, naphthenic base oil demand is brisk in end-uses such as automotive tyres and electrical transformer oils. Pale oil end-uses such as metal-working fluids and other lubricating fluids are also showing good demand.

In the naphthenic base oil sector, supply in most grades is considered to be snug and tight for several suppliers.

At least one Pale oil supplier this week said it is seriously considering raising prices on its naphthenics because of the rising feedstock costs and tight inventories in several of its base oil grades.

($1 = €0.76)

By: Judith Taylor
+1 713 525 2653

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