A car parked around the corner from my office has a large sticker in the shape of a giant Band-Aid, apparently placed there to hide a dent on its shiny surface.
In view of the many issues that the base oils industry has faced in recent months, participants must have been busy applying Band-Aids to cover some of the nicks and scratches acquired along the way. Some of the troubles run deeper than a surface wound, and the bleeding, in many cases, is hard to stop.
One of the major and most direct challenges has been the sharp crude oil price fluctuations over the last year. West Texas Intermediate futures steadily declined from above $50 per barrel in February 2015 to around $30 per barrel in February this year. A global economic slowdown and instability in equity markets have also had an indirect but dampening effect.
Worldwide base stock oversupply conditions are deep-rooted and continue to weigh on prices, and producers have recurrently resorted to decreasing postings and offering special discounts to protect market share.
The question is: How many more price cuts can the market bear, given that prices have fallen to painful lows?
A round of decreases took place in January, resulting in posted price cuts of 10 to 15 cents per gallon for API Group I oils, 10 to 16 cents for Group II grades, 10 to 15 cents for Group II+ oils, and 10 cents for Group III products.
Shortly after, on Feb. 16, Motiva sliced even more deeply, cutting its light-viscosity Group II oil by 15 cents per gallon, its mid-vis grade by 20 cents and its heavy-vis oil by 25 cents.
On the naphthenics side, Ergon lowered values 20 cents in late January. Other producers abstained from moving prices because many expected the market to tighten on the back of turnarounds and the force majeure declared by Cross Oil after a January fire that damaged the hydrotreater serving its 5,000 barrel/day pale oil unit in Smackover, Arkansas.
Industry experts believe that, in the long run, base oil demand will grow in developing nations, and the market will eventually balance itself out. But the process is likely to leave casualties, and even the strongest companies may find it a bit harrowing to overcome.