Base Oil Price Report

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Group II producers Chevron and Motiva both lowered posted base oil prices in the United States, but their changes stirred markedly different reactions in the market. Observers said they expected Chevrons markdown and saw it as an attempt to bring its postings in line with those of other Group II suppliers. Motivas action surprised some, and was viewed by many as a possible indication that the market has gotten over the hump in its recovery from unprecedented disruptions.

Chevron cut prices for all three of its Group II stocks by 12 cents per gallon Friday, a day after ConocoPhillips imposed decreases of 16 cents to 22 cents. Both companies had participated in the most recent round of price hikes, in August. To the extent that last weeks markdowns erased those increases, it brought those companies back into line with Motiva and Flint Hills Resources – the nations other major Group II suppliers – which did not raise postings in August.

Motivas decreases, announced Monday, were viewed in a completely different light. Effective today, it imposed reductions of 10 cents to 15 cents on all of its stocks except a 12 centistoke neutral, which it kept unchanged. Buyers speculated that Motiva acted with less regard for competitors prices than for other factors such as an improving demand-supply balance, rising inventories and the impact of a 15,000-barrel-per-day expansion at its Port Arthur, Texas, plant. The expansion made the Port Arthur facility by far the largest base oil plant in the world, but its weight was not immediately felt because an existing part of the plant was shut down temporarily for maintenance in July.

Buyers theorized that the new volume from Motiva and several months of smooth sailing for refiners has helped the market recover from a series of plant disruptions in the second half of 2005 and early this year. Some went so far as to say that supply for some grades now appears long.

I think whats happened is that, since early to mid-August, the full impact of Motivas expansion has been realized, one buyer said. Demand has slacked off and inventories are up, so one of the main arguments for the August price hike – that supply was tight – clearly no longer applies.

Motivas abstention from the August round of hikes and todays cuts have not only eliminated the Group II premium; its products are now priced significantly below the postings of all corresponding Group I stocks – at least 13 cents lower on light- and mid-viscosity grades. Some observers predicted that the current situation is not sustainable and will drive Group I suppliers to lower prices, too. Others argued that Group I supply will remain relatively tight for several weeks due to maintenance turnarounds now underway at Citgos plant in Lake Charles, La., and Marathons in Catlettsburg, Ky.

The cost of crude oil on the New York Mercantile Exchange closed yesterday at $58.56 per barrel, according to Bloomberg. That was $2.63 lower than the price a week earlier.

Historic U.S. posted base oil prices and WTI and Brent crude spot prices are available for purchase in Excel format.

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