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Base Oil Report

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When Hurricane Katrina struck the Gulf of Mexico Coast in late August, it cut near the heart of the U.S. Refining industry.

The monster storm did not damage any of the regions base oil plants. But that does not mean the base oil market escaped unscathed.

Katrina did force the closure of one of North Americas busiest terminals for Group III imports – the Stolthaven terminal at Braithwaite, La., which ConocoPhillips uses to receive and dispense oils produced in South Korea by S-Oil. As S-Oils exclusive marketing agent in the United States, ConocoPhillips is one of the two largest Group III suppliers in the United States, and the Stolthaven terminal is its biggest supply point.

ConocoPhillips also sells S-Oils Group IIIs through terminals on the West and East coasts, and it sounded optimistic that it could avoid disrupting deliveries. Still, more than a week after the storm, officials said they did not yet know if Stolthaven was damaged or when it would reopen.

There appeared to have been no damage at several base oil plants that stood in or near Katrinas path, including ExxonMobils in Baton Rouge, La., Ergons naphthenic plant in Vicksburg, Miss., and Calumet plants in Princeton and Shreveport, La. Observers cautioned, however, that the base oil market could yet feel a squeeze because of damage to fuel refineries, eight of which were closed down by the deadly hurricane. Four were still

closed by mid-September, and the U.S. Energy Department warned that they might not restart for three months or more.

Although none of the downed refineries produces base oils, observers worried that the loss of 5 percent of the nations fuels production could tighten gasoline and diesel supplies, driving up fuels prices and creating pressure for further price hikes for base oils. Fuels and base oils use the same feedstock – vacuum gas oil – and the need to keep up with fuels margins has been one of the main factors blamed for the past years runup in base oil prices.

If theres a gasoline shortage, and the refineries that are running are pushed to make as much fuel as they possibly can, a base oil marketer said, theres no question that it would lead to a drop in base oil output, and that [base oil] prices would go up as a result.

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