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Base Oil Report

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The U.S. base oil market goes through a decline every winter, as finished lubricant production ebbs to its lowest level of the year. So well-worn and expected is the pattern that base oil suppliers hardly blink at the drop-off in demand.

This year the market seems to view the cycle a bit differently, however. Producers of paraffinics, at least, say they welcome the lull as respite in a year when they have been pressed to meet customer demands. The paraffinics market has been tight for much of the year – a combination of increased demand and restrained supply. Lubricant production and base oil purchases rebounded after a three-year decline. At the same time, high gasoline prices have led many oil majors to divert feed-stock from base oil to fuels production.

Were actually looking forward to having things slow down a little, one paraffinic marketer said. Things have been so crazy. We spend all our time talking about how to keep up from day to day, instead of trying to manage the business.

The naphthenics side of the market is in a different situation, with winter likely to bring not relief, but a further tightening of the market. Pale oils have been even tighter than paraffinics in 2004 – with rising demand frustrated by cramped supply since the closing of two Shell plants in 2003. Some suppliers say they have been turning away potential customers.

Now that side of the market is bracing for maintenance shutdowns scheduled this month at Cross Oils plant in Smackover, Ark., and in January at both Lyondell-Citgos Houston plant and Ergons plant in Vicksburg, Miss.

Normally, of course, people try to build up inventory beforehand to avoid disrupting deliveries, one supplier said. But I just dont see how thats going to happen, as tight as the market has been.

Sounds like it could be a bare winter for naphthenic buyers, while paraffinic sellers may enjoy a chance to catch their breath.

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