Prices of other petroleum products tend to follow a common pattern: Most change daily or are fluid throughout trading days and closely track the movements of other products, chiefly crude oil.

Base oils have separated themselves from such daily vacillations of prices. This is due in no small part to the complex nature of base oil pricing, where individual grades and types carry distinctly different values depending on quality, availability, location, and the specific demands of buyers. Base oil prices move much less frequently – usually just several times per year – and although they track values of products such as crude oil and vacuum gas oil, there is normally a lag of several weeks or months.

Things seemed to change in February, at which time the base oil market started more quickly to mirror movements in raw material costs. The lag behind crude levels disappeared, and base oil prices followed crude increases within days rather than months. Sellers were desperate to increase prices and for a few weeks made veiled threats about withholding production – only to have buyers make a daily sport of calling their bluff.

The shock was particularly jarring because base oil prices had previously declined over a period of some 10 months. Demand within Europe and traditional export markets looked likely to remain poor, so base oil values were expected to stay low even in the face of rising crude and feedstock prices.

It is worth mentioning that whilst values for Group I base stocks were falling, prices for imported Group II grades were being quietly pushed upward. At the same time, Group III base oils had not only maintained their price differential relative to Group I oil, but had exceeded all expectations by running at around a $700 per metric ton differential. This situation was welcomed by the sellers of Group III grades but was greeted with little enthusiasm by European Group I producers.

Then the bubble burst, and, almost in lockstep, all producers hiked base oil prices, not by the usual $10 or $20 per ton, but in some cases by $80 to $100 per ton.

The cause of this irrational transition was unclear at the time, with some players insisting that the specialty label had been removed from Group I base oils and replaced with commodity instead. Most in the industry denied this, but base oils acted as if they had joined the ranks of other petroleum products. A number of publications tried to apply pricing science to base stocks, drawing inferences between base oils and gas oil, finding correlations between fuel oil and gas oil combinations, using sweet crude and sour crude mixes to plot base oil pricing.

The facts of the matter were more straightforward than the spurious and sometimes nefarious connections that some theorized between base oils and other refinery production. Simply put, producers could not afford to sell base oils at the levels being set by the market because of higher feedstock costs. Difficult choices had to be made. Producers could either increase prices to levels that supported netbacks on these grades and that covered direct and indirect costs. Or they could stop production of base oils until the market recognized the real value of the products, at which point production could be restarted.

This second option might be unrealistic because many base oil production units are not designed to be routinely turned on and off. However, some extreme measures were adopted by one Russian refiner that had flooded the market with a number of large base oil cargoes at the lowest prices seen for a number of years. It then proceeded to halt production in one refinery and severely limit output in another, thereby creating an immediate shortage of material in the Baltic, Black Sea and European markets.

Producers that were unable, for technical or commercial reasons, to adopt these somewhat draconian tactics, were faced with an unpalatable decision – either sell produced base oils at the low prices or hold stocks back, hoping that the market would change and that prices could be increased.

When base oil producers took the drastic step to limit supplies, prices increased almost instantaneously, and within a matter of six weeks shot up by some $350 to $400 per ton. This was enough to cover the price hikes of feedstocks such as VGO. As this issue went to press, prices had leveled off, and a plateau appeared to have been reached where producers were covering their costs and making margins. At the same time, buyers and receivers were able to access sufficient supplies of base oils to cover current finished lubricant demand.

What has amazed a number of players is the speed at which the base oil market reacted to a situation that had become untenable and could not be sustained. Perhaps this shows that the specialty market, to which Group I base stocks firmly belong, can respond almost as quickly as the commodity markets of gas oil and fuel oil that fluctuate on a daily basis.