In January, Kline & Company, a worldwide consulting and research firm serving the needs of organizations in the lubricants and base stocks industry, introduced its monthly Base Stock Margin Index, a characterization of recent cash margin contributions in the U.S. base oil market over the past 24 months.
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.
“Contract cash margins for both virgin base oil producers and re-refiners improved in October as feedstock prices continued to fall faster than postings. VGO, the feedstock for virgin Group II refiners, dropped by 14% over the past month, while base oil postings fell by a lesser 8% on average from September through October,” said Ian Moncrieff, who manages Kline’s price forecasting activities. “As raw material costs continued their descent in October, the majority of base oil producers announced posting decreases during the first week of November. Generally, posting adjustments lag changes in feedstock prices by at least one month, often longer. Margins on spot trade, as well as lagged postings, are showing a downward cash margin trend. Since June 2014, Brent crude oil has collapsed from $110/Bbl to $80 as of today, VGO and refined products have followed suit. Base oil prices, both on contract business linked to postings and in the spot market, have also weakened, but by lesser amounts to-date. If the free fall in mainstream oil prices is finally halted by the end of 2014, we expect to see a slide in contract cash margins as the embedded lag in posting adjustments finally catches up with real time market conditions. Underlying fundamentals remain weak, as new capacity continues to come on line in Europe (SK-Repsol in Tarragona, and Shell-Hyundai Bank in Korea), and the end of the buying season is imminent.”
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, Director (Ian.Moncrieff@klinegroup.com) at (973)-615-3680 in Kline’s Energy Practice.