U.S. Base Oil Report

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U.S. base oil postings revealed no further movement this week, following a spate of price decreases that were put into effect earlier this month. Producers knocked off an estimated 20 to 65 cents per gallon from all paraffinic posted prices. Naphthenic suppliers also lowered pale oil prices recently by similar amounts.

Despite suppliers attempts to attract buyers by cutting prices regularly in the past five months, demand remains at a snails pace. Sellers are eagerly waiting for improved signs to emerge from buyers suggesting readiness to beef up inventories in advance of the spring season. Mid-to-late February is usually the time when activity picks up, to remain at healthy levels through early June.

Since reaching their all-time highs in the third quarter of 2008, posted prices for neutrals have shed on average $2.50/gal for light vis base stocks and $2.20/gal for mid viscosity grades. The bright stock posted price has lost about 30 percent, or just under $2/gal.

Currently, crude oil and feedstock costs seem to offer little support for stiffer base oil pricing. Common denominators used by some base oil producers to derive postings are the value of West Texas Intermediate (WTI) crude oil (a traditional benchmark/guide for the energy industry) and/or vacuum gasoil (VGO) prices.

At times when prices are more advantageous, integrated refiners will enhance production of refined transportation products rather than using VGO feedstock for the making of base oils. The downside to this concept, however, is that the alternative fuel value is not as lucrative for many refiners as seen a year ago.

In recent weeks, WTI has become disconnected from the rest of the world and other crude types, according to a number of refiners. Historically WTI has maintained a premium to Brent, the European benchmark, but lately WTI prices have slipped below Brent values by an estimated $8 per barrel – sometimes more.

Light Louisiana sweet (LLS), another popular crude, is holding about $8 per barrel over WTI as well. Even Gulf Coast Sour crudes are reigning significantly above the WTI price, at premiums of up to $5 per barrel.

The main contributor to the decline of WTI values is that inventories at Cushing, Okla., where WTI oil is stored, are at extremely high levels and there is little relief seen on the horizon to help ease the supply position there.

Meanwhile, on the base oils front, a few plants have been taken off line for planned maintenance during the January-to-March timeframe. It is also suspected that a number of lube facilities are running at reduced rates to help alleviate bulging stocks.

In its fourth-quarter 2008 earnings conference call on Feb. 5, Sunoco Inc. said it was curtailing operations at all its refineries as a “challenging” environment looms for refined products this year, with the soft economy cutting fuel demand. The company said it expects to match operations to market demand expectations, and that it throttled back its crude units to run at just 76 percent of capacity during January.

Although base oil production was not specifically addressed in the earnings report, market players suspect that the cutback would impact this segment of Sunocos business, too.

Company officials also said Sunoco planned maintenance at its 85,000-barrels-per-day crude oil refinery in Tulsa, Okla., this month, but did not give any further details. Tulsa is home to Sunocos 9,500 b/d Group I facility.

Looking further upstream, OPEC, supplier of more than 40 percent of the worlds oil, may cut production at a meeting next month if prices and markets are unstable, Iraqi Oil Minister Hussain al-Shahristani said.

If demand is going to stay down as it has done, then obviously we will need to cut production, the oil minister said at a conference in Doha, Qatar, earlier this week.

The Organization of Petroleum Exporting Countries meets on March 15.

At the close of the Tuesday, Feb. 17, NYMEX session, front-month light sweet crude futures settled at $34.93 per barrel, a loss of $2.62/bbl compared to the week-earlier settlement of $37.55.

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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