The puzzle still exists and discussions are perhaps more prevalent than ever about the relative value of base oil versus the price levels of crude and other petroleum products. Buyers are still confused about why base oil prices have not come into line and do not follow percentage falls in crude and, perhaps more importantly, feedstocks.

Producers, on the other hand, maintain that raw material costs coupled with higher operating overheads justify the present prices for supplies of various types of base oil. Buyers dispute these figures and claim that base oils should follow the trend of crude and other petroleum products more closely, particularly during a downward cycle.

In making a straight line correlation between the current prices for base stocks and levels for Dated Brent crude oil, many questions are raised that ultimately suggest the two types of material are only marginally related. But the question still lingers: Shouldnt base oils, being a derivative of various grades of crude oil, at least follow a similar downward or upward trend on a measured basis?

If the percentage drops in crude oil over the last year are interpolated into equivalent base oil numbers (including all types and grades from all market sectors and regions), then the relative average price for all base stocks would equate to approximately U.S. $346 per metric ton. A snapshot average actually derived from weekly reports from the three global regions, produces an average level of around U.S. $658 per ton. How can this disparity exist? And why does it occur in the base oil market?

Base oils are traditionally maintained as specialty products, not merely commodity extensions of various crude oils, as are other petroleum products such as gasoline and gas oil. These latter products are generally produced by independent or group refineries to meet regional or international standards. Base oils do not follow this blueprint, and each production run has its own specifications and characteristics.

Supply and demand are also vitally important factors in the equation because regional shortages, however temporary, along with brief surges in demand for specific products or grades, can cause price pressures to build suddenly. These pressures affect not just the local market but also other source markets whose production may be used to cover immediate requirements.

For example, during September, all movements of export barrels out of Russian refineries came to a halt, causing shortages in Baltic and Black Sea ports. This shortage impinged on mainland European supply sources with the result that grades such as SN 500 were hiked by some $25 to $30 per ton. This worked against the tide of weaker crude numbers that had dipped to below $43 per barrel for Dated Brent during the same period.

Anomalies aside, base oil markets are much more complex than fuel markets. Some Group II producers, particularly in the United States, began lowering prices during August and then embarked on another round of realignment discounting during October. These movements affected not just Group II markets in the Americas, but also Europe and the Far East, which depend on imports from the U.S.

At the same time, Group I producers in Europe were trying to stem price erosion on grades such as SN 500 and bright stock, using a tight market as a basis for holding prices higher. With the downward swing in Group II prices, buyers assumed that prices for Group I, and to some extent Group III, should also come into line, or at least maintain pricing differentials between the various groups of products.

Group I continues to remain tight in light of refinery closures that have already taken place and other future production losses that were announced during the autumn. With the removal of five Group I production units over the past two years, and the threat of more to come, buyers of these grades have started to look at longer term supply reliability. These buyers have been negotiating long-term arrangements with suppliers and producers, causing the market to become ever shorter, with many suppliers currently declaring no availabilities until the first quarter of 2016.

Has this caused prices to move up due to rising demand? The answer is No. Prices remain stable to weak during November and December due to yet another contributing factor on the horizon. Specifically, financial directors are issuing instructions for inventories to be minimized at year-end due to taxation matters, so marketers of base oils are duly discounting prices to promote the prompt sales of stocks.

At each turn of the base oil market, there always appear to be factors, sometimes remote and seemingly unrelated, that affect the supply and demand scenario for all types of base oil. These incidents are frequently interconnected, having knock-on and snowball effects throughout the base oil markets. There are only few periods when the base oil scene can be described as flat and uneventful, perhaps revealing that this specialty group of petroleum products is truly a one-off, bearing only tenuous relationships with other petroleum products and crude oils.