Base oils: US maintains its cost advantage

Judith Taylor

13-Feb-2015

The dramatic fall in crude oil prices that dominated the upstream picture late last year also set the pace for fourth quarter base oil prices. But US producers of base oils are still structurally in a favourable position

The backdraft of low crude oil prices burned its way into the US base oils market in the final quarter of 2014, as base oil producers and crude oil refiners sought to grapple with uncertain margins in the fuels arena.

 Traders in crude oil markets reacted rapidly as WTI and Brent prices fell

Copyright: Getty Images

Buyers’ purchasing interest stalled on sinking crude oil prices that pushed the energy complex into a spiral of bearish sentiment. Base oils were taken along on this ride as the buy side attempted to detect the bottom of the fall.

That market bottom has yet to be determined, according to any number of sources, whether in the base oil sector or among upstream players, with crude oil prices continuing to slide well below the $50/bbl mark during January 2015.

By mid-November 2014, posted prices for US base oils had fallen twice in the fourth quarter of that year, provoked by the drop in upstream feedstock prices. Many base oil market players expected that to be the final round of decreases for the year.

However, this expectation proved not to be the case as Motiva rocked December base oil price perspectives by dropping its Group II posted prices by 50-55 cents/gal, depending on viscosity grade, effective 16 December.

Other Group II producers brought posted prices down by similar levels, with Group III posted prices then moving down by 40 cents/gal on announcements by SK Lubricants and Phillips 66. Group I producer HollyFrontier announced posted price reductions of 45 cents/gal on all viscosity grades except brightstock, which it lowered by 35 cents/gal.

ExxonMobil’s Group I prices came down by the same levels on 22 December, with Paulsboro Refining Co (PRC) finishing the bout of reductions on 26 December. ExxonMobil does not comment or confirm its price changes and asks this point to be clarified.

The mid-December posted price reductions put Motiva’s Group II 100/120 viscosity base stock at $2.45/gal on an FOB (free on board) US Gulf basis. Motiva’s 600 heavy grade Group II stock is at $2.80/gal following the steep decreases, with Chevron’s US Gulf posted prices also moving to these price points.

ExxonMobil’s Group I posted price on its SN 100 base oil is at $2.50/gal following December decreases, with its heavy grade 600 at $2.65/gal and brightstock at $3.91/gal. Comparatively, ExxonMobil’s posted SN 100 base stock was at $3.05/gal in mid-November, falling 41 cents/gal from the previous week with the tumble still gaining momentum.

The ExxonMobil brightstock posted price was at $4.46/gal in mid-November, with the company electing to hold that price and skip any decreases on the heavy grade in November’s reduction outbreak.

Naphthenic base oil prices also fell in the fourth quarter, alongside the drop in the paraffinics and also pushed by the dive in the upstream prices.

Pale oil producers reduced prices across the board on all grades by 15 cents/gal in November, reacting in part to the slide in upstream feedstock prices. Naphthenic producers dropped prices on all grades by 20 cents/gal across the board in December, pushed again by the feedstock cost spiral.

The December reduction was followed by a 15-25 cents/gal reduction on all pale oil grades in January 2015 as crude oil prices continued to drag the market down and naphthenic base oil producers were forced to compete with buyers’ expectations of overall lower pricing.

PRICE DIFFERENTIALS DISAPPEAR
Base oil oversupply and low crude oil prices are driving an additional trend in the market: compression of global base oil price differentials. Quality variations between the tiers are being diminished by harsh competition driven by global oversupply, market sources said at the 10th ICIS Pan American Base Oil conference held in December in New Jersey, US.

“Quality distinction is not making a difference in Group I and Group II pricing,” said Ian Moncrieff, director at consulting firm Kline & Company, during his presentation at the conference. He noted that base oil capacity utilisation rates are moving towards historic lows – the cash break-even point for an acceptable margin is a utilisation rate of about 85% for Group I plants and about 75% for Group II.

Group II base oils are mainly produced by hydrotreating processes and largely integrated into the overall operations of the refinery. Group I base oil plants use a solvent treating process, often referred as solvent neutral, and are often an additional unit added to a refinery, Moncrieff explained, adding that “at current levels of capacity utilisation at Group II plants, the margins are significantly higher than for Group I”.

Another aspect of the evolving shift in the base oil tiers comes from an observation that US and Canadian base oil refiners have a structural advantage compared with the global ­market. “There is a structural advantage for these refiners that is inherent to the region,” said ­Stephen Ames of SBA Consulting. Ames explained that this advantage stems from the shale gas phenomenon that results in cheaper operating and overall energy costs for refiners and producers in the US and Canadian portions of the North American region.

Ames excluded Mexico in this scenario because it does not have the huge natural gas and shale oil plays found in the other two areas.

Another part of the structural advantage comes from logistics, Ames added. With significant infrastructure in place along the US Gulf coast, shipping costs and timeframes needed to move material to South America, Europe and Africa are typically more attractive that those from other base oil producing regions such as Asia, he mentioned.

According to Ames, US exports of base oils reached 45% of local production in the first half of 2014, and that figure is set to grow as new capacity comes on-stream and structural advantages from shale oil and gas persist.

The deep discounts for US crude grades versus Brent are helping refiners greatly, even though the swelling US supply of tight oil from shale formations poses challenges.

Tight oil from the Bakken formation has seen a 12-month average discount to Brent of around $15/bbl, while WTI – the main US crude marker – averaged a discount of $8/bbl. Each $1/bbl of discount translates to an advantage of around $7/tonne in the cost of producing base oils, Ames said.

GAS PRICE ADVANTAGE
US refiners and associated base oil units are also helped by the relatively low natural gas prices and related utilities costs that the country enjoys due to the exploitation of shale.

For Group I and Group II base oil producers in the US and Canada, the lower gas price 
delivered an advantage of $18/tonne over European producers, and $30/tonne over South Korean rivals. The advantage stretches even further for Group II lube hydrocracking plants, which produce hydrogen by using natural gas both as a feedstock and a fuel.

US producers can source hydrogen for around one-third of the cost in Asia, delivering an $80-100/tonne advantage for the hydrogen factor alone, a recent conference speaker said.

Other advantages for US base oils producers include economies of scale, and closer integration into larger and more sophisticated oil refineries on the US Gulf Coast. US base oils plants have an average capacity of 767,000 tonnes/year, compared with 293,000 tonnes/year in Europe and 374,000 tonnes/year in Asia.

The advantage that US Group I producers hold over Europe can range from $55-140/tonne. US Group II producers are estimated to have a $125-170/tonne advantage over counterparts in Asia. Although there are some risks to those structural advantages, and their magnitudes may vary from producer to producer, the benefits will not disappear “anytime soon”, Ames said.

Judith Taylor is a senior editor in the ICIS Houston office. She reports on several market segments, ­including base oils

READ MORE

Global News + ICIS Chemical Business (ICB)

See the full picture, with unlimited access to ICIS chemicals news across all markets and regions, plus ICB, the industry-leading magazine for the chemicals industry.

Contact us

Now, more than ever, dynamic insights are key to navigating complex, volatile commodity markets. Access to expert insights on the latest industry developments and tracking market changes are vital in making sustainable business decisions.

Want to learn about how we can work together to bring you actionable insight and support your business decisions?

Need Help?

Need Help?