Global Lubricant Basestocks: Market Analysis and Opportunities

Kline’s Index of Base Stock Production and Re-refining Cash Margins Indicates Market Turbulence Since 3rd Quarter 2016

Kline’s July 2017 edition of the Base Stock Production and Re-refining Cash Margins Index, which characterizes recent cash margin contributions in the U.S. base oil market, indicates market turbulence since 3rd Quarter 2016.

The Index estimates cash margin contributions associated with U.S. Group II base stock production. It simulates EBITDA before the deduction of corporate SG&A expenses for typical VGO-based virgin base stock plants and RFO-based re-refineries.

“Since the publication of the last Margin Index, Kline has been addressing certain structural changes in the world base oil market, which have necessitated adjustments to the economic model underlying the index,” noted Ian Moncrieff, Vice President of Kline’s Energy Practice. “These changes address the progressive increase in the proportion of spot trade in the market mix, as structural length in the market continues, as well as the widening gap between posted prices and actual sales through contract, index-linked, and spot channels. The Index incorporates an estimate of the relative volumes of base oil sold via these channels and simulates the weighted average discounts of the trade mix relative to postings.”

“Brent crude oil and hence VGO pricing has been somewhat volatile, which started off as a curse but is now a blessing to base oil refiners. From September 2016 through February 2017, feedstock costs steadily rose and, as base oil posted prices lag these input prices by one to two months, margins for conventional Group II refiners and re-refiners reached a three-year low in January 2017. From March onward, Brent crude oil prices have been on a slow decline, reaching $46/Bbl in June. Furthermore, as indicated by the most recent months of the Margin Index, the lag effect provides a benefit to refiner profitability. While feedstock costs have dropped by 13% for conventional refiners and 14% for re-refiners since February, product prices have increased by 1% for conventional refiners and 8% for re-refiners. Re-refiners have also seen an extra boost to their top-line figures, as asphalt market prices rose with the seasonal increase in demand during the second quarter relative to the first quarter.”

“Another reason for the decline in margins from September through January was the over-supply of base oil in the global base oil market. In the last half of 2016, there were reports of heavily distressed Group III base imports entering the U.S. Gulf Coast that may have resulted in downward pressure on Group II prices. Furthermore, the Energy Information Administration report of ‘Product Supplied of Lubricants’ (which we believe is a close simulation of U.S. domestic demand for base oils) is down by 4% for 2016 as compared with 2015. With overall demand down from 2015 and higher quality base oil imports at extraordinarily low prices, the Group II market faced a difficult second half in 2016.”

“Group II margins rebounded in the first quarter of 2017 and then performed exceptionally well in the second quarter of 2017. One potential explanation is the unexpected outages and turn-arounds that caused temporary tightness market in the first half of 2017, which has produced an uplift for the Group II market. However, over the long term, market fundamentals still indicate over-capacity and continued pressure on base oil refining margins.”

For more information on the Kline Index or to inquire about our pricing and margin analysis services to the base stocks industry, please contact Ian Moncrieff, Vice President ( at (973)-615-3680 in Kline’s Energy Practice.

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