But suppliers and purchasers agree that upward pricing pressure has been eased by the recent increases, along with drops in crude oil costs. Suppliers sometimes cite demand as a major factor in pricing, but talk this week seemed to focus more on refining margins. With crude prices falling to approximately $24 per barrel this week, gross base oil refining margins, based on the lowest U.S. base oil posting, have risen to 58 cents per gallon.

Thats roughly 20 cents below the generous margins that prevailed last year but very consistent with long-term trends.

If you look at average margins over the past 10 or 15 years, what we have today is almost exactly in line, one purchaser said. Of course, buyers would always like to see prices drop but I think current prices are pretty reasonable. As long as crude stays in the $24-$25 range, I think [base oil] prices could be stable for awhile.

Oil traders say that crude costs have eased because of indications that oil and gasoline inventories are ample, at least for the moment. Analysts expect supplies to tighten during the second half of the year.

In the base oil market, there appears to be more uncertainty about the continuing shift in demand from Group I to premium stocks. Driven in recent years by upgrades in motor oil standards, the shift is expected to get another bump as the industry prepares for the adoption of the next upgrade, GF-4,by the fall of 2003. The question is the extent to which blenders will switch from Group I. The answer depends on requirements for the new specification, which are currently being drafted.

I think people are still keeping a close eye on the GF-4 meetings, a base oil marketer said. A lot of people are doing bench blends and trying to get themselves into position to line up suppliers.

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