US Group II margins fall on oversupply

US Group II base oil margins over feedstock costs and competing fuels fell during the week ended 1 March as demand remains weak and supplies continue to grow.

The Argus domestic spot US Group II N100 premium to four-week average low-sulphur vacuum gas oil (VGO) feedstock fell to 90¢/USG, down from 93¢/USG the previous week. Margins remained below year-earlier levels of $1.32/USG.

The Argus domestic spot US Group II N100 premium to four-week average US Gulf coast diesel fell to 45¢/USG, down from 46¢/USG the previous week. Margins remained below year-earlier levels of 90¢/USG.

There continues to be a global oversupply of Group II base oils as production rates remain elevated. Domestic and export demand for diesel is weak, causing refiners to produce base oils at higher levels despite weaker margins.

Elevated borrowing costs and interest rates are also weakening demand, but seasonal factors like the upcoming driving season are expected to create an uptick in demand in the spring.

There are discussions of sending cargoes into lower priced markets including west Africa, Mideast Gulf and India in attempts to clear surplus inventories. There has been limited demand from Europe, but the volumes are not large enough to balance out the market.

Export prices are stabilizing as many refiners are facing offers at discounts to VGO. Some refiners are not willing to sell below VGO levels and prefer to push more volumes into internal fuel blending.

By Deyzhah Knox