Base oil suppliers still have a ways to go to match the nearly 67 million barrels they manufactured in the peak year of 2006, yet signs of steady recovery are discernible. For both paraffinics and pale oils, output in the second half of the year was stronger than in the first half. (Total production in second-half 2010 was 30.8 million barrels, versus 29.2 million in the first half.) And U.S. refiners failed to better their 2009 monthly yields only twice in 2010, September and October, when several large plants were down for maintenance work.

Strong demand all year meant process oil sales, especially naphthenics, came back closer to normal, pre-recession levels, observed San Antonio-based consultant and process oil specialist Terry Hoffman. “This was driven by, number one, the upturn in manufacturing in general and then number two, by the auto industry’s recovery,” he said. “With the restructuring of GM and Chrysler, auto production was way down in 2008-2009 – and every car you don’t build has four tires you don’t need to make. In 2010 we saw that tire demand come back.”

The appetite for electrical transformer oils was also healthier, remarked Tulstar’s Jeremy Kriska, in Houston. “We saw transformer oil demand rebound as well, because the housing market picked up and that means more transformers are needed. The auto and tire sectors picked up a lot, too. The traditional base oil buyers like grease producers and lube manufacturers pretty much seem to be recovering, but maybe not at the same pace as auto and housing.”

Base oil production in 2010 might have been greater yet, “but if you look at the whole refining industry, the fuels margins in the Northeast U.S. were horrible,” said Patrick Gribbin of Holly Refining, which makes API Group I base oils in Tulsa, Okla. Unable to profitably make gasoline, some refiners throttled back their crude units, resulting in reduced operating rates for all their downstream units such as base oil plants. “Refiners have gotten a lot smarter on the incremental barrels. If the demand isn’t there, they just won’t make it,” Gribbin commented.

Thats not optimal for base oil production, however. “If you want to run a Group I plant at maximum production, you need to operate the crude unit at better than 90 percent,” explained Hoffman, who formerly was with base oil refiners Valero and Sunoco.

Hoffman said gasoline margins were particularly weak in the first quarter of 2010, which held back crude inputs and as a consequence restrained base oil production. “And by September-October, the gasoline crack spread was at or even below the refining cost. So right around Labor Day, as fuels demand eased up, we saw some refiners move their maintenance work up, to take advantage of a low-margin period when they weren’t going to run at capacity anyway.”

Chevron, for example, took the opportunity to tune up its Richmond, Calif., Group II base oil plant, which had been seeing poor yields all summer, and Ergon moved to perform a turnaround on its Vicksburg, Miss., naphthenics plant that originally was planned for February 2011. Both were back on line by October’s end.

First-half 2010 also saw a gradual drawing down of overhanging base oil inventories, but then demand began to rebound in earnest, Holly’s Gribbin said. Ever since, refiners have had little leeway to rebuild their stocks, he added. Some were outpaced by the rising market, “and couldn’t get in front of it. Right now we’re in a similar situation again – and we’re just hitting the beginning of the spring driving season.”

Bright stock is another product that continues to be in very tight supply. Last summer’s closing of Shell’s Montreal base oil plant, which made bright stock, further snugged things up, and it now takes very little to create a shortfall in supply, noted Hoffman. North America’s two largest bright stock refineries are ExxonMobil’s Baytown, Texas, plant and Holly’s in Tulsa.

This coming quarter could be a dynamic one, Gribbin predicted, with crude price volatility, rising inventory costs, and uncertainty over whether refining margins will stick or slip. Even so, 2011’s first quarter has been better than last years, he stated. “First-quarter 2010 was at least 30 percent better than ’09, and our January and February this year were much bigger again. Last year felt fragile all year but things seem much more secure now. The scary thing will be if crude oil continues its march – that could shut it all down.”

Hoffman too sees a very changeable market. First, “there traditionally might be some turnaround work before the gasoline driving season kicks in. Then there’s the events in the Middle East, which we may not have seen the worst of yet. We’ll need a few more months to see what the ultimate impact is on crude supply, and then on base oils.”