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Kline Base Stock Margin Index reflects continuing market turmoil

Hydrocarbon Engineering,

In January, Kline & Company, a worldwide consulting and research firm serving needs of organisations in the lubricants and base stocks industry, introduced its monthly Base Stock Margin Index, a characterisation of recent cash margin contributions in the US base oil market over the past 24 months.

The Index estimates cash margin contributions associated with US Group II base stock production. It simulates EBITDA before the deduction of corporate SG&A expenses for typical vacuum gas oil (VGO)-based virgin base stock plants and residual fuel oil (RFO) based re-refineries.

Margins on spot trade, as well as on lagged postings, are showing a downward cash margin trend. Since June of 2014 as Brent crude oil has collapsed from US$110/bbl to approximately US$60 today, VGO and refined products have quickly followed suit. Base oil prices, notably on contract business linked postings, have weakened also, as evidenced by the latest round of posting adjustments recorded in mid-December. If the free fall in mainstream oil prices is finally halted by the end of 2014, Kline expects to see a slide in contract cash margins as the embedded lag in base oil price adjustments finally catches up with real time market conditions. Underlying fundamentals continue to be weak, as new capacity has come online in Europe (SK-Repsol), and in Korea (Shell-Hyundai Bank).

Adapted from a press release by Emma McAleavey.

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