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Base Oil Report


After yanking base oil prices upward for much of the year, crude oil costs finally eased in late August. Opinions differed, however, about whether base oils will follow the retreat anytime soon.

The steep ascent of crude prices this year affected most economic activity, and the lubricants industry was no exception. Paraffinic base oil postings rose four times in the first eight months, and most of the blame went to crude prices, which climbed approximately 45 percent over that period. Base oil marketers said the crude run-up raised raw material and energy costs, as well as the opportunity cost of making base oil instead of fuel.

Crude finally slipped in late August and early September, from record highs near $50 per barrel into the low $40s. Not surprisingly, base oil buyers were soon declaring that suppliers should start giving back the markups imposed earlier.

If you look at margins, theyre pretty respectable now, one buyer said early last month, after the years fifth round of base oil price hikes. Gross refining margins for low-priced Group Is were around 60 cents per gallon then, so I think theres an argument for lowering base oil prices if crude keeps falling.

Marketers advised that buyers not count on it. For one thing, they noted, base oils typically lag crude going up and down, and so base oil producers would be cautious about cutting prices given the potential for disruptions that could send crude spiking again.

Perhaps more importantly, marketers claimed another factor is now buoying base oil prices: demand.

We see demand being really strong right now, so I dont expect prices to drop anytime soon, one marketer said.

One supplier has surprised the market by keeping prices low – at least in relative terms. The September round of increases left Motivas Group II solvent neutral 105 priced 5 cents per gallon cheaper than the countrys lowest Group I SN100. Motiva had raised eyebrows earlier in the summer when it began chipping away at the Group II premium, which had been 9 cents. But observers were utterly amazed to see Group II prices slip below Group I. When ConocoPhillips decided not to join the September round of hikes, some speculated it was responding to Motivas aggressiveness.

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