For example, when crude and feedstock prices fell below U.S. $90 per barrel for Dated Brent, base oil prices remained high, in some cases rising even higher. Producers cited two factors as justification. First, they claimed that base oil availability was limited. Second, they said that, although demand was not as strong as in previous years, prices were still related to current raw material costs, which were relatively high.

Eventually, these arguments began to lose credence, and buyers adopted the stance that falling crude and feedstock costs should be reflected in base oil prices. Marketers began to capitulate when Russian exports of solvent neutral 150, SN 500 and SN 900 from the Baltic and Black seas started to crash. This made distributors and resellers desperate to clear stocks as quickly as possible, in the belief that crude and petroleum product prices would continue falling.

Sellers of Russian oil were also convinced to take this action due to the lowering of free carrier prices for Russian refinery output. This production appeared to have gone long after some six months of coming back into balance. With the commitment of lower priced material arriving at shore tanks, sellers of these grades slashed prices and consequently dragged the base oil market into free fall.

Price changes of $100 per metric ton over a period of one week were not uncommon during July. And pricing levels for Group I solvent neutrals fell to their lowest levels in nearly five years. Some reported FOB (freight on board) prices for these oils as low as $850 per ton for premium quality production from mainstream refineries in Europe.

These prices had retracted by nearly $400 per ton in a particularly short time. This fueled expectations that the market had bottomed out and that base oil prices would start the climb back to more sustainable levels. However, the products market was still falling, and there was no driver to make prices rise until world events intervened.

When Iran started sabre rattling against Israel and the United States, crude prices suddenly vaulted from $90 per barrel to around $107 per barrel in only two weeks. This alone had the effect of pushing gas oil prices to levels not seen for the previous five months. With gas oil prices overtaking base oil levels, the economics were apparent to all.

Or were they? Around this same time, many base oil producers were approaching the summer vacation season with high inventories. And buyers were staying away, counting on stocks they had built up to see them through the holiday periods in Europe and Middle East. An added element was that both Ramadan and Eid al Fatr came early this summer, coinciding with European vacations. This convergence created a near vacuum in the market, and very little business or trade was transacted.

Even given these circumstances, base oil prices still did not respond to the rising costs for crude, which peaked at about $117 for Dated Brent at the end of August, or to the fact that ICE gas oil reached $104 per ton for September front month trading. Base oil producers no longer appeared to be long in inventory, but one crucial factor was missing: demand.

With virtually no demand throughout the region, few deals were made, and no revisions were added to pricing that could be attached to offers to help lift base oils out of the void. Levels continued to stagnate with many suppliers stating that they had no material to sell. Instead, they preferred to conserve material they had in stock to avoid selling base oils at a loss.

One interesting development for Group I oil during this period was that bright stock suddenly went very long throughout the region. Prices dipped to such an extent that bright stock was being sold at levels below those of heavy neutrals. This anomaly posed problems for producers because production and handling costs for bright stock are higher than those for solvent neutral grades. This temporary situation was resolved when bright stock went short at the beginning of September. At that time, prices went back to levels above those of solvent neutrals – but only in areas where bright stock could be found.

Group II grades were sucked into this price vortex, having to maintain a respectable differential to Group I prices. Availability was stimulated by the situation in the Far East, where demand was exceptionally slack.

This glut was pushed into India and the Middle East. However, with these markets languishing in downturns, there was little success in increasing volumes into these areas. Europe was identified as a possible market for these barrels, and many producers were prepared to compete with Group II prices there to gain market share within mainland Europe. Also, at this time, importers from the U.S. were experiencing supply problems due to production restrictions, which perhaps allowed some Far East sourced imports to enter Europe.

Within Europe, Group III base oils have tended to exist in their own, almost isolated market, with little reference to other grades other than maintaining a hypothetical differential between Group III and Group I solvent neutrals of around $500 per ton.

Group III prices have held almost firm throughout 2012 and might have increased had it not been for the ingress of new material – mostly a single, giant facility – from Middle East production. Even though this volume is not for general sale and is being used only by the controlling company, it has had the effect of diluting the Group III market. This is due to fact that the material used previously by the company in question has been released into the general market, changing the scenario from short to balanced – and perhaps even long.

The market in Europe, the Middle East and Africa has traditionally featured a base oil time lag, whereby price changes are frequently delayed. But the market has changed, and whilst producers have to recognize and reflect raw material costs, there would appear to be some independence from straight line cost allocation for base oil production.

Perhaps with costs being reviewed less frequently than for other petroleum product groups, refiners are prepared to look on a longer term basis at the contributions that base oil realizations add to the overall slate. For example, base oils produced high netbacks for many months before crude levels started moving around, so perhaps an ethos of swings and roundabouts prevails within the industry.

Recent months have shown once again that base oil prices are driven by a number of complex factors. One cannot rely on them to always behave in ways that are expected.