Sources described those increases as reactions to several factors. The most immediate was a December announcement by Shell Oil Products U.S. that it will close its Deer Park, Texas, base oil refinery at the end of March. The plant accounts for 11 percent of the nations naphthenic capacity, and observers say Shells announcement has already set off a scramble by purchasers of electrical transformer oils, a primary use of naphthenics.

Gross refining margins were also said to be a factor in the price hikes. The naphthenic side of the market missed out on the last round of price increases by paraffinic base oil suppliers, which occurred during the second half of October with crude oil prices hovering in the range of $28 to $29 per barrel. Crude subsequently fell, but jumped last month to its highest level in two years. The price of crude on the New York Mercantile Exchange dropped $1.08 yesterday to close at $31.08 per gallon.

Base oil sellers and buyers alike predicted the higher crude prices will lead paraffinic suppliers to raise their prices, too.

Sources said supply could tighten if the strike that has hampered Petroleos de Venezuela S.A. continues. Venezuela is the worlds fifth-largest oil exporter but production by its state-owned petroleum company has slowed to a trickle since its workers struck Dec. 10. Observers say this could impact the U.S. base oil market in two ways. First, because PdVSA is a major base oil supplier in Latin America, it could drive blenders in that region to make purchases from the United States.

Secondly, reduced crude supply from Venezuela could disrupt feedstock supply to the United States and force closure of some refinery complexes that include base oil refineries. A Louisiana congressman warned last month that Citgos Lake Charles, La., refinery might close by the end of December if the federal government did not release oil from its Strategic Petroleum Reserve. The request was denied and Citgo says its refineries are operating as usual, thanks to crude purchases on the spot market.

Base oil suppliers say they are also worried that crude prices could jump even higher if the United States leads an attack on Iraq. Some military analysts have said that February would be the most strategic time for such an event.

We think something could happen as early as the end of January, one supplier said. If that happens, all bets are off. We think the logic in the market is to implement some increases now to be better prepared if that happens.

Some sources suggested the market could be further roiled by disruptions in Korea – and not just because of newly flared tensions over North Koreas nuclear weapons program. According to news reports, South Korea announced yesterday that it will curb exports of oil productsif crude prices rise much higher. South Koreas SK Corp. is one of the largest exporters of base oil to the United States, selling Group III stocks through its U.S. affiliate Lithcon Petroleum Inc.

The upward pricing pressure in the U.S. market may be exacerbated by rising demand. Demand typically tails off at the end of each calendar year, both because of a seasonal lull in lubricant production and because blenders try to lower inventories in order to minimize tax bills.

Were through the end of the year so theres no motivation to reduce inventories any more, a base oil purchaser noted. Buyers arent holding back now. In fact, if they think prices are going up theyre going to be trying to fill their tanks.

Posted paraffinic base oil prices in the U.S. are unchanged this week.

Historic U.S. posted base oil prices and WTI and Brent crude spot prices are available for purchase in Excel format.