Prices for crude and vacuum gas oil both continued to climb through mid-June, and with fuels refining still offering an easier path to profits, base oil refiners asserted that better margins are the incentive needed if they are to make base oil. Back in January, U.S. refiners were making only 3 cents per gallon on gasoline, but weekly advances meant that by mid-May they had pushed margins to nearly $1.00 per gallon – huge for this industry. So if they cant cover the added cost of running the units and also make more money on base oils, theres little reason to divert VGO from their fuels crackers.

Meanwhile, supplies of base oil seem more than ample, enough so that U.S. exports have steadily risen for much of the past year. Driving this trend, say industry observers, is the fact that API Group II base oil supplies have been long, especially after the addition of significant capacity last year at Motiva in Port Arthur, Texas, and Chevron in Richmond, Calif. Faced with slackening demand at home in the first quarter, many base oil barrels floated offshore to seek buyers, which they found largely in Europe. Here, U.S. oils enjoyed an off-list price advantage, especially versus the local offerings.

Now there are hints that the situation may be changing, and that the tide of exports may see some counteraction. Even as prices rose last month in the United States, they were falling in Europe. This is leading buyers to again contemplate arbitrage. Some say they may actually plump for European barrels – or maybe theyll just try to use the difference to pressure base oil sellers to give up a little of their latest gains, perhaps as off-structure relief.