Along with the cost of crude oil, fuel prices have fallen significantly from record levels reached in the wake of Hurricane Katrina. Crude prices in New York have hovered below $60 per barrel this month, down from a peak above $70 at the end of August. Gasoline prices in United States have slipped approximately 25 percent over the same period.

Prices for vacuum gas oil, which is used to make both fuels and base oils, have likewise fallen in recent weeks. Observers say this has greatly enhanced margins for base oils. The most recent round of price hikes for paraffinic base oils in the United States began in mid-September. Western Europe has actually undergone two significant increases since then.

What it all adds up to is that [gross] base oil margins are at record levels, one base oil buyer said. And not only that; theyre far above the previous record, which was set last January.

Base oil marketers acknowledged that their economics are much improved. They maintained, however, that base oil margins were relatively poor for much of the year, as repeated price hikes failed to keep up with cost escalation.

Margins are very good today, one supplier said. Three months ago, however, we were whining about how bad business was. For the year as a whole, producers are still a considerable distance from meeting their business plan. If these margins last for the rest of the year, there is a chance that the year will not be a total loss.

Buyers and sellers agreed that shifting economics is restoring the attractiveness of base oils for refiners.

We think there is an incentive for refiners to produce lubes again, another buyer said. Its just a matter of time before production catches up with what is now a more attractive lubes margin.

While some sources predicted that supply-demand balances of base oils will soon loosen, others suggested other factors may keep markets tight for several months. First of all, they argued, U.S. suppliers are struggling to replenish inventories that were drained by plant shutdowns caused by Hurricane Rita. At the same time, several key plants around the world are trying to prepare for maintenance shutdowns scheduled to begin in coming months.

Posted prices for paraffinic oils in the United States were unchanged again this week. The cost of crude on the New York Mercantile Exchange closed yesterday at $58.91 per barrel, according to Bloomberg. That was $2.01 higher than a week earlier.

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