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Base Oil Report


As the holidays rapidly approach, there is growing evidence that demand in the U.S. base oil market has started to cool down from levels seen the previous few months.

While most suppliers will agree that this is not untypical for the time of the year, and usually tally the expected slowdown in their annual projections, there is widespread concern that this time, the decline may be an early intimation of cooling conditions in the first quarter of 2014.

That is when Chevrons new 25,000-barrel-per-day API Group II plant in Pascagoula, Miss., is expected to go on stream. While the company maintains that the product mostly will be sold into Latin America, Africa and Europe, domestic suppliers worry that the market will become flooded with base oil and, logically, that prices will fall.

There are already clear signs that values are suffering because of the mounting supply levels, as producers have started to look for ways of lowering inventories by enticing buyers.

Behind the scenes, a number of sellers have quietly started to grant discounts to some customers, although not everyone is able to trim prices as margins remain tight.

While the amount of discounts varies, it is generally understood that reductions in the vicinity of 10 to 15 cents per gallon were taking place by early November. In a few cases, suppliers have had to match the spot reductions to retain market share, particularly for a few large-volume accounts.

Group II spot prices were said to be experiencing the most erosion, with some domestic and export price ideas heard below $3 per gallon FOB U.S. Gulf. However, term contracts or cargoes expected to ship early next year are not enjoying the same discounts, sources emphasized.

The chilled demand levels may not thaw until the beginning of the second quarter, pessimists say, when buyers start to prepare for the spring production season and market activity usually heats up.

Some suppliers try to remain optimistic, hoping that the additional supply will eventually be absorbed as global demand rises for Group II cuts, driven by stricter fuel economy and emission standards. Yet others cannot but shiver when thinking about the extra barrels that may drift aimlessly around the market for a while.

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