In January, Kline & Company, a worldwide consulting and research firm serving 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. A more detailed description of the Margin Index can be found in the January release.
“Despite the recent round of Gulf Coast Group II posted price decreases for base oils announced in early and mid-August (ranging from $3.00-$8.00 per barrel, depending on viscosity), virgin base oil producers experienced the highest instantaneous (unlagged) cash margins they have seen in 10 months,” said Ian Moncrieff, who manages Kline’s price forecasting activities. “Not only did spot Brent crude drop by over $5.00 per barrel during August, but VGO cracks vs. Brent also fell by a similar amount. As a result, feedstock costs fell by more than the announced reductions in postings, improving base oil gross margins by $2.00-$7.00/Bbl. Coinciding with a nominal drop in natural gas prices, total COGS fell by nearly nine percent in August. Meanwhile, UMO feedstock costs for re-refiners experienced a lesser reduction, which did not exceed the reductions in base oil postings, resulting in slightly lower profitability for the month of August.”
“Looking to the near future, recent weakness in crude oil and VGO pricing has not yet been fully reflected in postings of base oils, though these effects have begun to be felt in spot prices,” Moncrieff continued “Base oil fundamentals remain weak, and Kline expects that a further round of posted pricing adjustments is probable within the next two months.”
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.