Base Oils Undergo First Price Cuts Since 2002

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Group I base suppliers in the United States are lowering prices this week, following markdowns by Group II suppliers the past two weeks. Collectively, the actions constitute the markets first general round of cuts in more thanfour and a halfyears.

Lubricant blenders said it was high time for decreases, given the extent to which crude oil costs have fallen in recent weeks. Opinions split, though, about whether further cuts should be expected. Some observers suggested that looming price increases for finished lubricants may hang in the balance.

Prices have been going up for so long, I think everyone became callous and just accepted the increases without too much of a fight, said James L. Kudis, president of the Independent Lubricant Manufacturers Association. But the cost of crude has come down significantly, and it had to start coming through to base oils.

Spurred by a record-setting run-up in crude costs, paraffinic base oil prices in the United States climbed with unusual sharpness after the start of 2004, undergoing 20 rounds of increases through August of this year. The market had not undergone a general decrease – one joined by all major suppliers-since the first quarter of 2002, though producers of Group II oils cut prices in November 2003.

The ride showed signs of running out in recent weeks. Group II producers Motiva and Flint Hills Resources abstained from the August round of hikes. ConocoPhillips and Chevron reduced posted prices late last month – essentially erasing their August markups and getting back in line with Motiva and Flint Hills. Motiva and Flint Hills clipped price tags last week, putting their postings at double-digit discounts to Group I stocks.

The Group I segment finally followed after ExxonMobil announced Friday that it would cut prices on light neutrals by 15 cents per gallon and on medium-viscosity grades by 10 cents per gallon, effective yesterday. The volume leader left postings on heavy neutrals and Group II-plus oils unchanged.

Sunoco and Citgo followed an identical pattern with reductions that take effect today and tomorrow, respectively. Calumet will take 15 cents off Group II light neutrals Friday. There was no word of changes by Valero, but observers expected it to join the movement.

There was strong consensus among blenders that price cuts were absolutely called for by the recent trend in crude costs. Crude costs in the United States have retreated more than 20 percent since topping $78 per barrel in July.

But there were disagreements about the likelihood of markdowns becoming the new trend. Some noted that supply of heavy base oils remains tight and that two Group I plants – Citgos in Lake Charles, La., and Marathons in Catlettsburg, Ky. – have been closed this month for maintenance work. On the other hand, some pointed out that Motivas and Flint Hills postings are still below those of corresponding Group I products.

That suggests that despite [this weeks cuts], Group I producers are still too high relative to Group II supply, said a blender who spoke on condition of anonymity.

Some blenders said lubricant additive marketers should join base oil suppliers in lowering prices. Major additive companies imposed another round of hikes this month and last.

Thats the real question, because part of the justification that additive companies gave fortheir increaseswas base oil costs, said Cary A. Palulis, general manager of lubricants for Chemlube International, a lubricant blender based in Harrison, N.Y. So now that base oil costs have fallen, are the additive companies just going to pocket that 15 cents or pass the savings along to customers?

Further down the supply channel, lubricant distributors were already suggesting that big oil companies should consider rescinding price hikes on finished lubricants that are scheduled to take effect at the end of this month and into November. Citgo has already done just that, and a few other marketers postponed their increases from earlier this month.

I think they should all take [the markups] back, said a Midwestern distributor, who asked not to be identified for fear of offending his supplier. I dont know if they realize just how strongly consumers are resisting this – especially with gasoline prices falling. But were the end of the whip, and its pretty plain to us.

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