Spreading Like Wildfire
In the months of February and March, much anxiety in the marketplace was linked to the new coronavirus—or Covid-19—that originated in China and rapidly propagated throughout the world.
The outbreak triggered a global economic downturn, as the number of infections multiplied and businesses felt the effects of the implementation of mass quarantines and transport restrictions.
In China, many manufacturing facilities closed temporarily due to the absence of employees and the lack of raw materials, causing disruptions to the supply chain and manufacturing operations of many other nations that rely on Chinese parts and components. The automotive industry seemed to be particularly impacted by these developments.
The virus outbreak was also behind a precipitous fall in crude oil and feedstock prices, which was later complicated by a spat between Russia and Saudi Arabia over crude production rates. Given the worldwide economic slowdown, base oil producers were driven to slash posted prices in early March.
On March 1, Motiva was the first producer to step out with a price decrease of 40 cents per gallon. The markdowns spread like wildfire as a majority of Groups I, II, II+ and III suppliers similarly reduced postings shortly after.
The initiatives called for decreases between 30 and 40 cents per gallon for paraffinic base oils, with the markdowns becoming effective March 1-10. On the naphthenics front, producers also announced decreases of 25 cents/gal.
Aside from lower crude values, falling base oil demand coupled with the likelihood of a product overhang caused by the effects of the pandemic were also behind the price drops.
The decreases reflected how quickly the market situation can change and how promptly producers must respond to these fluctuations—much like firefighters trying to put out a fire—since the decreases came less than a month after the implementation of a round of price increases in late January and February.
While nobody was able to predict when the coronavirus epidemic would get under control and the number of infections would start to recede, it was obvious that participants in the base oil and lubricant markets would have to adapt to the swiftly changing conditions and revise their forecasts to prepare for the harsh reality of the next couple of months.