US base oil margins improving on price increases, lower VGO

21 April 2014 20:19 Source:ICIS News

US base oil margins improving on lower VGO and price increasesFocus story by Judith Taylor

HOUSTON (ICIS)--US base oil margins are improving as lower vacuum gas oil (VGO) costs and recent posted price increases ease the thin profitability options that reigned in the first quarter.

Prices pushed up between 5 March and 8 April on base oil supply narrowing due to refinery turnarounds and buyers slowly re-entering the market ahead of the upcoming traditional late spring bounce in demand fostered by the onset of the heavy US driving season.

Chevron’s 5 March price increase announcement of 25-30 cents/gal, depending upon viscosity grade, for its Group II paraffinic base stocks sparked other increases across March and into early April.

The price change put Chevron’s light grade 100/120 viscosity base stock at $4.12/gal FOB (free on board) US west coast.

Group II producers Motiva and Phillips 66 moved posted prices up by 8-20 cents/gal, depending on the supplier and the base stock grade, effective 26 March.

Calumet Specialty Products raised prices on its Group II base stocks by 10-20 cents/gal, depending upon the viscosity grade, effective 31 March.

Group II supplier Flint Hills Resources (FHR) announced posted price increases of 10-18 cents/gal, depending on the base oil grade, effective 28 March.

The Group II increases gained strength as posted price announcements were also made by producers in Group II+ and Group III tiers, ranging 14-20 cents/gal depending on grade and supplier.

Group I producers moved prices up as well, with ExxonMobil, HollyFrontier, Paulsboro Refining Company (PRC) and Calumet increasing posted prices between 1 and 8 April, depending upon the producer.

ExxonMobil’s price increase of 1 April brought its brightstock price to $4.66/gal FOB US Gulf.  

Adding to the margin relief underpinned by the price increases, VGO costs have also abated, falling back from a near benchmark $3.00/gal flirt in January/February to more typical $2.50s/gal by late March and early April.

US base oil producers struggled with high feedstock VGO costs throughout the first quarter of the year, squeezing margins to discouraging levels.

Sellers said that the cost of key base oil feedstock VGO has bit deeply into margins, 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 commented.

VGO prices were in the high $2.50s/gal in November 2013. But the feedstock cost jumped into the high $2.90s/gal in December and maintained that level well into March, sources said.

VGO prices skipped over the $3.00/gal mark during this period, a base oil seller said.

The chart below offers some insight to the VGO volatility factor versus standard grade Group I SN 150 viscosity base oil.

US base oil prices

Paraffinic base oil posted prices decreased in January because of wide 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.

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By Judith Taylor