Glenn: Base Oil Buyers Can’t Count on Forecasts Alone


HOUSTON – As a lubricant industry consultant, Thomas F. Glenn makes his living partly by forecasting – predicting sales trends, divining the impact of technological developments and foretelling future demand-supply balances.

These days, though, he is advising people not to count too much on predictions – be they his or anyone else’s. The president of Petroleum Trends International Inc., of Metuchen, N.J., is talking about just how wrong forecasts can be, and he has an example that is compelling and present: the base oil market of the past two years.

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In a presentation Friday to the National Petrochemical and Refiners Associations International Lubricants and Waxes Meeting, Glenn reminded his audience how different market conditions should have been according to forecasts of the past several years. He said that industry trends make the future increasingly difficult to predict and argued that this underscores the need for contingency planning.

Glenn started by recalling several forecasts – made over the past several years by individuals he did not identify – that were supposed to divine the state of todays base oil market. Two predicted that the industry would have surplus supply and be a buyers market. Another, from early this decade, anticipated gas-to-liquids base stocks flooding the market by now. Others foretold the elimination of polyalphaolefins from the lubricant industry and of Group I oils being relegated to low-priced applications in South America.

As Glenn noted, the past two years turned out entirely different. Base oil supplies tightened in most regions, largely because of an unprecedented string of supply disruptions but also because of healthy demand in some regions and competing demand for feedstocks. Prices rose fast and steadily because of tight supply-demand balances and sharply higher crude oil costs.

It has added up, Glenn said, to the toughest environment in memory for base oil buyers. He added that many were probably caught off-guard because they had listened to rosy forecasts by experts.

As most in the industry are aware, what they wanted to hear, what they wanted to believe, what they were being told and sold didn’t happen, he said.

Glenn said forecasters should not be faulted for failing to predict the troubles of the past two years. Some of the biggest factors were a hurricane and accidents that forced temporary closures at numerous plants – all events that could hardly have been foreseen.

In fact, Glenn indicated that he still considers forecasting an important business tool, offering more predictions about the markets near-future. He advised that plant expansions, increased import activity and the long-awaited introduction of GTL oils will alter the fundamental supply-demand balance, creating surpluses that should help repress prices.

Still, he warned that unexpected events could again draw a much different scene on top of that baseline. In fact, he contended that the potential for serious supply disruptions has increased due to consolidation of base oil capacity. The United States has 20 plants now, compared to 37 in 1984. The average size of those plants has swelled during that time from 6,373 barrels per day to 10,680 b/d, meaning that plant outages carry a bigger impact.

Baseline forecasts will be increasingly less reliable and increasingly more dangerous to base your business on, Glenn said. In fact, the only thing certain about these forecasts is that they have a high probability of being wrong. And the only question is by how much?

Given the increased level of risk, Glenn said it is imperative for base oil buyers to develop contingency plans that can keep them supplied with raw materials in the event of disruptions. Possible steps include carrying larger inventories, checking to see if suppliers have contingency plans and understanding where one ranks among a suppliers list of priorities.

Glenn said he has seen many companies giving more attention to contingency planning this year, but he offered one more forecast: that many will leave those plans by the wayside if a year or two passes without major disruptions.

Its like a security system in your house, he said. Some people install a security system as soon as they move into a house. Then you have those who wait until they are robbed to install a system. Often, the latter group, the people who are reactive, will become lax after a period of time goes by, and theyll forget to turn on this system that they’ve installed.

I think you may see a similar type of behavior with contingency plans in

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