ExxonMobil yesterday announced an across-the-board increase of 10 cents per gallon on posted prices for paraffinic base oils in the United States, a move that raised prospects for a seventh round of hikes since late February.
Even so, the markets attention was mostly focused on Hurricane Rita, which churned towardthe U.S. Gulf of Mexico Coast that houses nearly half of U.S. base oil capacity.
ExxonMobil said its latest markups will take effect tomorrow, according to customers who added that the company attributed its move to tight supply. Some buyers questioned that explanation, insisting that the market has ample availability of some grades – especially Group II stocks.
I know for a fact that there are Group II suppliers with significant volumes that they are ready to move, one buyer said. So this availability issue seems to be a problem that is unique to ExxonMobil.
At least one other producer followed ExxonMobils lead before the close of business yesterday. Citgo said it will also raise all of its postings by a dime, likewise effective tomorrow.
Though still several days from landfall, Rita seemed to be following a pattern ominously similar to that taken by Hurricane Katrina before it tore through the Gulf Coast last month. Barging past the Florida Keys, Rita began yesterday as a tropical storm, but strengthened within a few hours to a Category 2 hurricane with sustained winds of 100 miles per hour.
Katrina was also a tropical storm when it crossed Florida but fed on the Gulfs warm waters to reach Category 5 status before it striking the coast Aug. 29. Forecasters warned yesterday that Rita could turn into a Category 4 storm with winds of up to 131 miles per hour before it reaches land. Current projections call for landfall to occur Friday or Saturday.
Hurricane paths are difficult to project so far in advance, but forecasters said Ritas current path placed the storm on a trajectory to strike the coast of Texas, with possible destinations from northern Mexico to Louisiana.
Although Katrina left the base oil market mostly unscathed, observers worried that Rita could take a more westward track and strike near the Texas-Louisiana border, where several base oil plants are concentrated. Seven plants are located in a 125-mile arc stretchingeast from Houston. Those plants have a combined capacity of 96,400 barrels per day, which represents 48 percent of the U.S. total.
Sources said plant operators were already making plans to shut down before Rita arrives.
It takes two or three days to do a proper shut down of these plants, one supplier said, so people really need to be starting that process today and tomorrow.
If base oil plants do shut down, the markets best-case scenario is several days of lost production, which would snug up demand-supply balances. Shutdowns also create the potential for accidents when employees try to restart plants.
Of course, a bigger threat is that Rita could cause damage resulting in extended downtime for one or more plants. Several fuel refineries that do not have base oil plants sustained damage from Katrina and are not expected to restart for several more weeks.
The base oil industry kind of lucked out with Katrina, one marketer said. But if a storm like that were to hit a little further to the west, it would just devastate the industry.
The price of crude on the New York Mercantile Exchange closed yesterday at$67.30 per barrel, according to Bloomberg. That was $4.20 higher than a week ago.
Historic U.S. posted base oil prices and WTI and Brent crude spot prices are available for purchase in Excel format.