Base oil suppliers insisted that margins were not so fat and that downward pressure had not materialized. Clearly, different perspectives were at work. Suppliers said theirs was based on recognition that vacuum gas oil is a better measure of base oil margins and that it has not followed crudes lead in the past few months.

Many in the lubes industry use crude prices for quick and easy calculations of base oil margins. It is largely a matter of convenience, since crude prices are readily available on a daily basis. VGO, however, is the direct feed-stock in base oil refining, and although VGO historically tracks fairly closely to crude, it has not for a number of months.

According to the independent reporting firm Oil Price Information Service, U.S. prices for cargo shipments of VGO averaged $1.18 per gallon the week of March 14. On May 24, the month-to-date average had actually risen to $1.20.

Because the lowest Group I posted price in the United States increased even more for the corresponding period, gross base oil refining margins swelled from 68 cents to 76 cents per gallon while crude retreated. Suppliers reasoned that one should have expected margins to grow during that time-frame because base oils typically lag behind feedstock prices.

Weve been getting calls from customers who see crude prices falling, and they want to know why we havent cut our prices, one supplier said. The thing we tell them is that VGO is our feedstock, not crude, and VGO prices have actually gone up a little.

It should be noted that base oil margins are significantly bigger than they were a year ago, when the low-priced Group I posting was $1.57 and VGO was at 92 cents. Another base oil supplier suggested that this longer-term increase was due to supply-demand issues. But that is another topic.