Taking Advantage of Crude Price Volatility

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A consultant told an industry conference that lubricant companies can benefit from crude oil price volatility if they carry minimal inventories, accurately forecast sales and use a mix of long-term and spot contracts for base stock procurement.

Adopting a model for working capital is one of the critical success factors for lubricant companies to get the most of the crude price volatility, according to Shailendra Gokhale, managing partner of Mumbai-based Rosefield DAA International Consultancy LLP.

You cant afford to carry higher inventory of base oil when probably the prices are going to fall, he said at the Asia, Middle East and Africa Bitumen and Base Oil Conference, organized by Petrosil Group. He added the huge inventory will become a burden and cost working capital as well as hit the companies bottom and top lines.

Gokhale said it is important for companies to build robust sales and to have thorough operations planning if they want to benefit from price volatility. Inaccurate sales forecasts will lead to missing out on opportunities because the procurement team may not be able to take advantage of a drop in prices and could be forced to do things such import base oils, he noted.

Make your supply chain agile to carry the minimum possible inventory and improve your sales forecast accuracy, Gokhale said.

Gokhale said reading base oil price movements is both art and science, and one should understand the base oil demand and supply cycles to advance or delay procurement accordingly. Your management has to be really quick in decision making, he added.

Companies can advance their base oil procurement if they see things are going to be in their favor, Gokhale said. If you see theres going to be a lot of supply, and prices are going down, then you may delay your procurement suitably.

Base oil, a key raw material for lubricants, is a derivative of crude oil, and its prices generally follow the trend in crude prices, with some lag.

Talking about the contract strategy, Gokhale said companies can follow a hybrid model wherein they can have a term contract with major suppliers supplemented by spot purchases as needed to meet their needs. The hybrid model of term and spot [contracts] would work well when you have the right percentage mix, based on product portfolio and storage infrastructure, he said.

Security of supply is the biggest factor in a term contract, he said. Flexibility to adjust deliveries can be built into that contract, but additional flexibility comes if blenders reserve some volumes for spot purchases, which allow companies to explore any source and take advantage of the cheapest offer. However, companies will find it difficult to maximize spot terms for certain specifications, and quality consistency would always be a challenge due to co-mingling, Gokhale said.

He added that smaller companies should combine their procurement volume requirement to get a better value from base oil traders. Battling alone cant help small companies get the best prices, he concluded.

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