Both are in turn affected by a variety of other influences. For example, demand can be stimulated by price, quality and availability of a product, while supply can be encouraged by higher margins and discouraged by higher raw material costs.

When supply and demand move freely, they tend in the long run to find equilibrium that enables markets to function efficiently. Outside influences, however, sometimes cause dysfunction that can make a market unbalanced or at worst destroy it altogether.

Eroded by Instability

During dire economic situations such as the one currently embroiling the Eurozone, the base oil market is still somewhat protected by the international nature of the business, which acts as a cushion for normal activity to carry on. However, domestic trade within the zone and European production have certainly been affected by the fallout over debt and deficits in some countries.

Base oil markets in Greece, Italy, Spain and Portugal have all been exposed from both ends; protests and other forms of civil strife have disrupted plant operations and reduced production, while economic decline has lowered demand for finished lubricants and therefore base oils – whether produced locally or imported.

Provisional estimates by market sources suggest that Mediterranean markets in general have seen base oil off-takes fall some 20 to 25 percent over last year. Some of this decrease resulted from the Arab Spring uprisings, but the overall impact has been significant.

Economic sanctions and civil strife have stifled the markets in near Middle Eastern countries such as Syria, Lebanon, and Jordan, preventing imports and restricting manufacturing of finished lubes. On the other side of the fence, demand in neighboring countries such as Turkey has grown, and with production almost at full strength, a great deal of material has been imported.

The mixed trends beg the question of whether the growth in adjacent markets really just represents a movement of business to areas that are more stable. To some extent, the original markets are being supplied through circuitous routes, but more links in the supply chain raise prices.

On the European mainland, a downturn in domestic manufacturing, building and other capital projects should have reduced lube and base oil demand, leaving excess base oil volumes in the nations that are most economically stressed.

Lagging Impacts

On the surface, it had been not obvious that this was happening. Either these refineries were already running at lower production levels, or a downturn simply takes time to filter up the supply chain. In any case, now are we starting to see signs of overproduction, with many of these producers trying harder to move inventory in the face of ever-declining demand.

This may explain why the base oil market hit the doldrums during the first quarter, even as prices for other products and crude remained high. The latter were responding to different types of demand, such as demand for gas oil and fuel oil, which were moving upwards due to severe cold weather. Base oils can only respond to one demand factor – the production of finished lubricants. Lube consumption, in turn only rises when economies are strong.

What is apparent from all the EU economic problems is that the base oil industry is perhaps the least able of all the product markets to respond quickly to changes in demand. When consumption in a particular region declines significantly, producers find themselves at the mercy of buyers.

In theory, draconian measures can be taken to balance production of base oils, although apparently not by conservative EU refiners. This could only happen in Russia, where a major producer halted all base oil production in favor of increased quantities of higher yielding gas oil. This in turn created a supply vacuum that was filled by other Russian base oils producers. Incredibly, this allowed base oil prices in the Russian market to increase even as they were held down elsewhere in Europe by lack of consumer confidence.

In physics, Sir Isaac Newton observed nearly half a millennium ago that for every action there exists an equal and opposite reaction. It appears that this also applies to activities in the base oil market.