Posted prices for paraffinic base oils have already risen three times this year – as often as they did in all of 2003 – but numerous suppliers contended that upward pricing pressure remains. Sources cited the same factors to which increases in January, March and May were attributed: rising costs for crude, high opportunity costs for gasoline and an unexpectedly tight balance between supply and demand.

I would expect price increases for both paraffinics and naphthenics, said one marketer. Our costs are up – crude is more than a dollar per gallon now. And the demand is definitely there to support base oil price hikes.

Crude prices are more than 40 percent higher than they were a year ago. Prices actually started to ease toward the end of last week, with the level on the New York Mercantile Exchange slipping below $40 per barrel. But prices jumped back up again yesterday after a weekend terrorist attack in Saudi Arabias key oil-producing region. Gunmen killed 22 people in Eastern Province, the center of the nations oil industry.

Saudi Arabia is the worlds largest oil producer and analysts said traders are concerned that supply could be disrupted by additional attacks.

The price of crude on the New York Mercantile Exchange rose $2.45 per barrel yesterday – the first day of trading since the incident – to close at $42.38, the highest level since trading began in 1983. Yesterdays closing price was $1.15 higher than a week ago.

Besides coping with higher feedstock costs, base oil suppliers are being pressured by gasoline prices, which proportionately have risen even faster than crude. Major oil companies that produce base oil say the development has encouraged them to raise base oil prices or divert feedstock from base oil to fuel operations.

To compound the situation, base oil demand rebounded this spring – more strongly than some expected – leaving supply tight for most cuts.

All the fundamentals would say the [base oil] market is primed for more cost increases, another marketer said. As each week goes by and crude stays up, and gasoline keeps going up and terror attacks continue, it seems more and more inevitable. Its definitely something that should be expected.

Valero has restarted the Paulsboro plant, which had to be shut down unexpectedly early last month as the company installed a low-sulfur gasoline unit. The base oil plant, which has capacity to produce 11,500 barrels per day, restarted late last month without further incident.

Posted prices for paraffinic base stocks are unchanged this week.

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