Base Oil Price Report

The price of crude on the New York Mercantile Exchange fell $3.26 per barrel yesterday – the largest drop in 16 months – as traders expressed hopes that any war in Iraq will be short. Yesterdays closing price of $31.67 per barrel was more than $5 lower than a week earlier.

The big drop greatly improves the position of U.S. base oil refiners, especially coming as it does on the heels of two rounds of base oil price hikes. The $5 reduction in crude costs fattens gross base oil refining margins by 12 cents per gallon.

But suppliers warned it will take time for the benefits to filter down to lubricant blenders. One supplier explained that sharp drops in crude prices typically spur base oil suppliers in Europe – the region with the most surplus base oil capacity – to increase production, resulting in increased exports that depress prices in the United States and elsewhere.

When crude drops like this, the Europeans start to run closer to capacity and that changes the supply-demand picture everywhere else, one marketer said. But it takes time for that to happen and for it to affect base oil prices – anywhere from one to six months.

Of course, the clock stops if something happens to drive crude costs up again. Clearly, most crude traders dont expect that to happen, but observers of the base oil market said suppliers probably wont even begin planning for price cuts until the situation in Iraq develops further.

Its still too volatile, a purchaser said. Theres too much uncertainty for people to make decisions.

Paraffinic base oil postings were unchanged from last week.

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