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Base Oil Report


Steep crude prices have plagued refining and downstream operations this year, particularly in March when oil values regularly crept over the $100 per barrel mark. Mid-April saw no relief as crude values continued to skyrocket to over $117 per barrel.

Needless to say, as refiners try to cope with these fast-rising operating costs, first quarter earnings are expected to fall short of those reported last year. This includes Valero, Chevron, Sunoco and Marathon, to name a few.

The same disappointing impact has trickled down and caused base oil producers big headaches as well. They have tried to offset rising crude and vacuum gas oil prices by steadily issuing posted price hikes. Despite their efforts, beefing up margins has proved difficult due to some sellers continuing to offer below-market-priced base stocks. Faltering bottom-line profits also succumbed to softer-than-expected demand from several consumption sectors and the weak U.S. Dollar.

A number of producers are running their base oil facilities at reduced rates in efforts to keep costs down, but at sufficient rates to keep consumers happy.

Even cutting back production at a number of plants has not paved the way for a better balanced supply/demand situation, admit some suppliers. Although the market is not as long in supply as four to six months ago, there does remain some sloppiness of certain grades.

Citgo Petroleum surprised the market in early April when it announced plans to reduce output at its Lake Charles, La., plant. In its notice to customers, Citgo explained the decision was consistent with a comprehensive evaluation of its lubricants business. As of the date of this letter [April 2], any purchase orders for base oil, process oil or wax placed with Citgo Petroleum Corporation will be subject to review by sales management prior to acceptance, the company said in its letter.

Some market onlookers anticipate several other (Group I) base oil facilities to follow suit. Future profitability will likely also be stymied by growing competition in the global market, the onlookers suspect, as more base oil production comes on stream within the next few years.

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