With demand and costs down simultaneously, this might seem like a logical time for cuts in U.S. base oil prices. Market sources advise, however, that markdowns are unlikely, at least until 2003. In fact, they cite flagging demand as the biggest reason for prices not to fall.
With the official start of winter just around the corner, the cold season this year is shaping up like most others for the base oil market. Sales normally tail off in late November or early December as the lubricants industry enters its slowest period of the year. Suppliers and buyers agree that business has begun to slow and that the market is typically quiet.
Gross base oil refining margins remain a bit higher than their average for the past two years. Thats because crude oil costs have hovered around $26 or $27 per barrel the past few weeks, a few dollars lower than their level at the time of the last base oil price increase, during the second half of October. (The price of crude on the New York Mercantile Exchange rose 6 cents per barrel yesterday to close at $27.30.)
Economic theory might suggest that such a combination of factors would encourage suppliers to lower prices in a bid to attract more buyers. Base oil buyers and traders say that seldom happens during December.
If you think about it, what would any producer gain by cutting prices at this point, one broker said. For one thing, blenders are lowering their inventories so there just arent any sales out there to pick up. Secondly, the competition would cut their prices, too, so they wouldnt gain any advantage. All theyd be doing is eating away at their margins.
Suppliers have been downplaying the likelihood of near-term price cuts and buyers say theyre convinced.
Im always glad to see prices decrease, but Im not expecting any changes in December, a purchaser said. This has historically been a slow month when not a lot changes.
Some sources said that export prices from Europe have dropped recently, increasing the attractiveness of arbitrage, especially for heavier neutrals. The catch is that blenders trying to take advantage of the situation must be in a position to accept large shipments.
U.S. posted prices are 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.
|