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Base Oil Report


Late May brings Memorial Day, the winding down of the school year, the start of the summer driving season and – this year – a price hike of 10 cents per gallon for base oil, announced by ExxonMobil as this issue goes to press. The additional dime was tacked on to its Group I and Group II+ postings effective May 25, sources said.

This was the first change in base oil postings the U.S. market had seen since prices slacked off early in the year. Thanks to looser inventories and easing of demand over the winter, prices in January and February had slipped about 25 cents per gallon from their peaks of last September, and then held steady for a few brief months.

That lull may be over now. ExxonMobil attributed its price increase to a need to sustain the margin difference between gasoline and base oils. This is in contrast to last years base oil price run-up, when five rapid-fire rounds of price hikes occurred and all fingers pointed to crude oil costs. Crude prices climbed above $70 a barrel in May 2006 and stayed there through August, and every refined product felt the jolt. Since then, however, theyve hovered in the high $50s and low $60s.

Meanwhile, oil companies are enjoying a bull market for gasoline. Average gasoline prices in May passed the $3 per gallon mark in many states (and over $4 in some areas of California), and analysts said refining margins were about $30 per barrel – among the fattest the industrys ever seen.

With an incendiary gasoline market and a comfy cushion of base oil inventory to fall back on – barrels of light grades in particular are said to be long – few should be surprised if refiners nudge their gasoline output a little higher and throttle down base oil a notch.

The question is whether base oil units at refineries will end up waiting at the back of the queue for feedstock, which could snug up supply. To secure a place at the front of the line, base oil processing may have to offer margins at least as good as the alternatives, if not better.

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