It would be remiss of this column not to highlight the events behind the falling base oils prices since this scenario is affected not just by changes in raw material costs, but also by political and economic factors that play an important demand role in the realignment of product values.

Questions are continually being posed as to how far base oil prices will eventually fall and the rate at which these changes may occur. Many of these questions are unanswerable, but comparing base oil prices with those for crude and other petroleum products shows that base oils have not fallen to the same extent. Therefore, there may be some further adjustments.

Brent Crude prices are currently about 55 percent less than those posted during June 2014, falling to levels not seen since the crash of 2008-2009. Meanwhile, base oil prices have retracted by only about 33 percent during the same period. Does this mean that base oil prices will fall another 20 percent or so? Not necessarily, because other factors both positive and negative will affect the eventual prices of these products.

Prior to the mid-2014 downward turn in crude levels, base oils had already been under price pressure due to extremely weak demand for both finished lubricants and base oils. The drop was due to extensive downturns, or at least stagnation, in economies such as the U.S., China, India and the EU. Some of these regions have recovered and are showing positive signs of growth. But other major consumer markets, China for example, have retreated further with no light yet at the end of a rather long tunnel. Another factor was the rising probability of a vast global oversupply of base oils, predominantly for API Group II products

Poor demand from just one major economy such as China has had a ripple effect across other peripheral and even global markets. As a result, the whole Far East region has been plunged into an abyss of deflationary drivers, with low demand for commodities such as crude and other petroleum products. Although base oils form only a small part of the picture, this situation, coupled with fast expanding newly commissioned production facilities, has been enough to trigger an oversupply, with base oils starting to go long and prices starting to decline.

The phenomenon of continually falling prices, irrespective of commodity, applies more to base oils than to any other petroleum product. Base oils are not normally purchased on a daily basis, nor is base stock turnover as prolific as that of other products such as gas oil and gasoline. This situation provides buyers with options when restocking base oil inventories, by perhaps purchasing smaller quantities more regularly; thus, benefitting from continually falling prices over a period of time.

This is not an option for refiners and resellers who have to contend with continuous line production, supply chain logistics and containment problems when stocks reach tank-tops. These factors also have to be added into the pricing mix because producers keen to move stocks out of storage will discount prices to encourage the movement of material.

Within EMEA, it could be asserted that a greater number of factors contribute to the decline of base oil prices than for crude and other products. However, due to the nature and frequency of base oil purchasing, there has always been a delay in the effects of lower raw material costs on base oil economics. On many occasions in the past, this has benefited producers because crude and feedstock markets often self-correct before base oils can fully react to the effects of lower raw material costs.

This market has witnessed a rate of change to base oil prices never seen before. With crude prices continuing to fall, base oil producers have reacted with large and significant price reductions, desperately clinging to market share which has become all important for survival.

EMEA has no official posted prices, like the U.S. for example, resulting in somewhat of a free for all, with one price being countered by another offer from a competitor. This has led to almost daily if not hourly price revisions by a number of sellers that stop only when margins dictate a limit.

A further problem is occurring in forward pricing of base oils. Some parties have seen fit to forecast future prices with no way to hedge these levels against a market rally. These prices have been inserted into firm offers and indications for product delivery months in advance, with players reading the market on the basis of straight line economics. Apart from the danger of artificially lowering forward prices, these actions will encourage defaulting on contracts should the market not react as expected.

One irony of the current situation is that refiners could be enjoying excellent margins and contributions from base oils in areas where lower production costs coincide with prices that are still relatively high. The large discounts announced by producers have been affordable and have been justified on the basis of retaining all important market share.

While this may appear to be a dream come true, a nightmare may be just around the corner. Without demand to lift production and with the threat of ever lower running rates at refineries, this situation may not last and could implode. There may come a time when the situation is reversed where crude and feedstock costs increase while base oil prices languish at their nadir, from whence they will struggle to emerge. Buyers expectations on pricing will remain lower than refinery costs allow, and demand may fall even further.

The future for the base oil industry both within EMEA and globally is one of uncertainty, with demand stubbornly remaining low coupled with ever increasing oversupply for all types of base oils.

RAY MASSONis director of Pumacrown Ltd., a trader and broker of petroleum products in East Grinstead, U.K. Send him comments or topic suggestions at pumacrown@email.com