US base oil margins crunched on high gas oil costs

07 February 2014 20:30 Source:ICIS News

HOUSTON (ICIS)--US base oil margins are crunched on high vacuum gas oil (VGO) costs and recent reductions in posted prices, market players said this week.

“Base oil economics are crazy right now, with high low sulphur VGO prices and low base oil netbacks,” a base oil market consultant said.

“With VGO prices so high, a price increase might have been more warranted than the recent price reductions,” one market source said.

VGO is a key feedstock for Group I and some Group II base oil production streams.

It is also a primary feedstock for fluid catalytic cracking (FCC) units where other refined products such as gasoline and distillates are produced.

Market sources said that a bout of refinery maintenance work in the US Gulf coast region is one underlying support factor for high VGO prices.

VGO was trading in the mid $2.50/gal range in November 2013, but jumped into the $2.90 range in December and stayed at that level, bouncing between the low $2.90s and the high $2.90s into this month.

The highest VGO prices in the last two years took place in April 2013, when values hit $3.30/gal.

The volatility in the price fluctuations are also a factor, with the climb to the 2013 high happening over a period of less than 30 days.

US base oil prices fell in January, as Group II producer Motiva lowered its posted prices by 25 cents/gal on the light and mid viscosity grades and by 30 cents/gal on it heavy viscosity base stock.

Motiva’s light viscosity Group II base oil posted prices are at $3.37/gal following the decrease. The company’s heavy grade Group II posted price is at $4.25/gal after the decrease.

Other producers announced posted price reductions on various dates, with decreases ranging from 10 cents/gal to 25 cents/gal, depending upon the producer and the base oil grade.

VGO costs form a main component in the degree of base oil margin opportunity versus the price of the base stock.

Follow Judith on Twitter

By Judith Taylor