Unlike crude oil, buyers and sellers of base oil trade privately and are under no obligation to disclose the value of contracts. This, of course, makes discovery of the value of these contracts a tricky business. It is not quite a black box into which price reporting companies peer, but it can be opaque.

Base oil prices are posted after the fact in various media and rely on validated input from market participants in order to present a true picture of what takes place between trading parties. This information establishes market-related price levels for the multitude of base oil grades, which are noted, recorded and circulated weekly to report subscribers.

However, price reports are no more than reference tools used to establish certain contractual arrangements for the forward purchasing of base oil. The figures contained in the reports are used as the basis for index-linking prices and are totally reliant on the accuracy of the information in each situation.

This is often a point of dispute between buyers and sellers, when one or the other feels that the prices being used are not representative of prevailing market conditions. The concerned party contends that amendments should be made to the basis of the agreement. These are often difficult situations to adjust and have proven costly in financial and relationship terms between suppliers and their customers.

To eradicate this potential problem, one idea has been to establish a base oil trading exchange as a mechanism to record price information that could be used by buyers and sellers in various markets around the world. This exchange would be a strictly physical delivery marketplace, where no futures are involved other than facilities to forward purchase and draw down inventory using a liquidity provision. Members of the exchange could be producers, end users, traders or distributors of the base oils listed for trade. Trades would be instructed to the exchange from members who are acting on their own account, without an intermediary.

The result would be a neutral, transparent and fair marketplace for all users, with markets being maintained 24 hours a day. The system could offer real-time price discovery and allow members to instruct spot and forward physical delivery trade types. This would ensure price neutrality, trade integrity, regulatory compliance and best execution of trades.

The principle of the platform would be to provide a live pricing model with the ability for users to enter live bids and offers in trading between approved counterparties on a bilateral basis. This would involve players using the exchange as a tool, in addition to normal commercial negotiations, to reach a position where all concerned would be able to see live pricing on the platform, while each trade or agreed deal would remain completely anonymous and strictly private and confidential, as is the norm.

By placing orders, firm bids and offers, participants would also have the ability to use advanced tools such as pivot point calculators and trend charts over a chosen time period. The information from the platform could be as specific or as general as required, with base oils being split into type, grade and, in some cases, specifications, all of which may be used for comparison and assessment of where markets are moving and when this may occur.

Additional services the exchange could provide may include enabling member access to capital liquidity to aid more flexible trading. The objective of the exchange is to enable members to be able to sell on a cash-against-contract basis, to buy on margin and/or deferred payment terms while avoiding cumbersome and expensive banking instruments, such as letters of credit, and, finally, to trade on a spot, forward or fixed-term sale or repurchase basis.

In addition, users would be able to use a facility to trade on margin and post, for example, 20 percent of the trade value with the exchange. Thereafter, the exchange would pay the seller in full cash against the contract. Frequent trading firms may express interest in margin trade. Members of the exchange, especially producers, can choose to use the facility to better manage stock and inventory costs versus cash levels by agreeing on fixed-price or term sale and repurchase-style transactions using the support of the exchange.

An important point is that users could make what they want of such a platform. They do not have to trade through this process if their preference is for established practices. But the required reporting of prices, bids and offers are the basic principles without which none of the other benefits would be forthcoming.

The potential benefits attached to adopting such a process for trading are the ability to access live pricing, place orders through the confines of an exchange, report sales anonymously, view past trades by grade, quantity and price, receive trade alerts, have access to technical analysis and catch up on and receive the latest market news and reports.

One such trading entity, the Integrated Nano-Science and Commodities Exchange, or INSCX, is attempting to do this. INSCX is an autonomous and independent closed-user, commercial physical delivery commodity exchange based in Europe. Others could be established ocally or regionally. Whatever the future holds, the bone of contention needs to be buried.