By Judith Taylor
HOUSTON (ICIS)--US base oil producers struggling with high feedstock vacuum gas oil (VGO) costs are instead, causing some producers to crack the crude oil directly to fuel and hold back on base oil production.
“If it does not pay to make the base oils, refineries are going to pull back on the production output and concentrate on fuels,” one producer 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 have said that a bout of refinery maintenance work in the US Gulf region is one underlying support factor for high VGO prices.
VGO prices were in the high $2.50s/gal in November 2013, sources said, but prices rose in December into the high $2.90s/gal and have maintained at that level through January and February.
VGO prices skipped over the $3.00/gal mark last week, one base oil seller said.
The high price level plus the general volatility of the feedstock’s cost behaviour is behind the struggle base oil producers are facing currently.
The chart below offers some insight to the VGO volatility factor versus a standard grade Group I SN 150 viscosity base oil.
The VGO situation is affecting both the paraffinic and the naphthenic base oil sectors. But the paraffinic tier is more vulnerable to the margin crunch than the naphthenic.
This is in part because within the paraffinic base oil sector, Group I and Group II base oils are vying largely in a similar customer pool that consists of buyers taking the base oil on to vehicle motor oils, the primary end-use product.
Naphthenic base oils – often referred to as pale oils because of their light colour – have a variety of end uses ranging from electrical and transformer oils to heavy-grade naphthenic oils for the automotive tyre industry.
Paraffinic base oil posted prices decreased in January because of widely prevalent double-digit discounting taking place due to ample supply of both Group I and Group II oils.
Price reductions of 10 cents/gal, 14 cents/gal, 13 cents/gal, 18 cents/gal, 20 cents/gal, 25 cents/gal and 27 cents/gal were applied to posted Group I, Group II, Group II+ and Group III base oil prices, depending upon the producer and the grade and each with differing effective dates in January.
One example is HollyFrontier’s light grade Group I SN 150 posted price, which moved from $3.61/gal to $3.47/gal in a 14 cents/gal drop effective 24 January.
Naphthenic base oil prices have remained steady throughout the VGO pressure, upheld by the spread of costs possible within the wider framework of end uses.
On the paraffinic side, one seller commented, “With fuel prices improving and [base oil] margins so skinny on paraffinics, we should expect to see refiners concentrate more on the fuel area”.
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