As the U.S. base oil industry ushers in the new year, prices are weighed down by significant oversupply and slumping crude oil and feedstock values, leading to recent price decreases and setting the stage for the markets performance in the first quarter.
A vast majority of paraffinic and naphthenic base oil producers adjusted prices down during the last two weeks of December, and most industry sources agree that further decreases could be in store if conditions do not improve dramatically in coming weeks.
The current imbalance between base oil supply and demand is not going to change overnight, sources emphasized, and most likely will not improve substantially in the first quarter.
Demand is not only typically slow at the start of the year, but the introduction of additional API Group II/II+ product from the ExxonMobil plant in Baytown, Texas, in early 2015 is likely to exacerbate the situation, sources added.
It is also not news that the behavior of crude oil prices moving forward will also have a tremendous impact on base oil prices. Crude prices, which have been on a sharp downward trajectory over the last two quarters and have plunged by close to 50 percent this year, are not likely to stabilize soon, continuing to place pressure on base oil values.
The most recent downward price revisions in the paraffinic segment, which followed several previous drops, were implemented between Dec. 16 and Dec. 26, and resulted in cuts between 35 cents per gallon and 45 cents/gal for Group I oils.
Within the Group II category, Motiva, Chevron, Calumet, and Flint Hills Resources marked prices down 50 to 55 cents/gal, while Phillips 66 dropped postings 60-65 cents/gal.
In the Group II+ and III segments, Phillips 66 and SK moved all of their Group II+/III prices down by 40 cents/gal, while ExxonMobils Group II+ oils were heard to have been lowered by 45 to 50 cents/gal.
On the naphthenic front, Ergon, Calumet, Cross Oil and San Joaquin all lowered pale oil prices by 20 cents per gallon between Dec. 8 and Dec. 19.
Plummeting base oil prices finally started to be reflected in finished lubricant prices, with Chevron being the first producer to step out with an up to 3.5 percent decrease for finished lubes, gear oils and greases, effective Feb. 6, 2015, for most SKUs.
While this decrease is a step in the right direction, a few sources commented that the reduction is insignificant compared to the large decline seen in crude oil and base stock pricing, and that they hoped further decreases would follow.
In the base oil segment, Group II grades, for example, have plummeted by close to 30 percent since mid-year. The 100/110 cut was hovering near $3.45/gal in early July, and fell to levels around $2.45 in late December.
Upstream, West Texas Intermediate crude futures initially regained some ground on speculation that an escalating conflict in Libya would help balance global supply and demand, but fell to the lowest levels since 2009 as U.S. crude inventories are expected to remain high in the short term.
WTI settled on the CME/Nymex at $54.12 per barrel on Dec. 30, down $3 per barrel from a settlement at $57.12 per barrel on Dec. 23. Brent crude was trading around $57.88 per barrel on the CME on Dec. 29, down $3.81 per barrel from $61.69 per barrel a week ago.
Historic U.S. posted base oil prices and WTI and Brent crude spot prices are available for purchase in Excel format.