By Thomas F. Glenn

Publisher, JobbersWorld 

Thomas Glenn

JobbersWorld presented a story last week comparing and contrasting movements in the price of crude oil with price changes in finished lubricants. As noted in that article, finished lubricant prices increase and sometimes decrease (or track) the price of crude. The reason it does is because crude oil is the feed stock used to produce the base oils, and many of the chemical intermediates required to manufacture performance additives used to make lubricants.

For the statisticians among our readers, the correlation coefficient between the price of crude oil (WTI) and base oil (100N Group II ) spot prices from 2004 to 2011 is 0.7. Whereas this clearly is not a perfect linear relationship, it is indicative of a moderately positive relationship and certainly one that has predictive value. And yes, this relationship is more about mineral oil based lubricants than it is about synthetic lubricants based on PAO and esters; they dance to the beat of a different drummer. Further, the spreads differ by base oil types and grades. Even beyond that, one has to also consider the not so subtle implications about the price spread between Brent and WTI crude, the events transpiring in the Middle East and North Africa (MENA) over the last couple of months, crude oil inventories, changes in tax policy, and other factors that impact the spread between crude oil and lubricant base oil.

But enough of the statistician and oil trader talk, the bottom line is that the price of base oil, and therefore, the price of finished lubricants are related to the price of crude.

Now on to the interesting stuff.

As shown below, the price spread between crude oil (WTI) and base oil (100N) averaged $1.27 a gallon from 2004 to April 1, 2011.  What this means is that if crude was trading at $x/gal, on average, base oil would sell for "x" plus $1.27/gal during that period.  Generally, for base oil producers, the greater the spread the better the day. This is because when the spread is high, base oil producers enjoy higher margins. When it's low, not only do they see lower margins, they also feel pressure from their upstream refining businesses to increase the price of base oil or run the risk of alternative value economics favoring the use of base oil feed to produce fuels rather than base oils.

To illustrate this point we only have to look back at what happened in the second quarter of 2008. That's when the spread dropped to almost $0.60 a gallon and many of the major oil companies were saying it would make more sense to crack vacuum gas oil (base oil feed stock) into fuel than to upgrade it and sell it as base oil. As expected, this resulted in the base oil producers quickly ramping up prices.

This is one reason why base oil spreads are important to watch. The spreads provide lubricant blenders and marketers with a predictive tool to forecast movements in base oil and finished lubricant prices.  In some respects, spreads can be looked at as an early alarm. Because when the spread drops below a certain threshold, we typically see base oil prices increase, which in turn, result in price increases on finished lubricants. 

At the same time, it's important to note there appears to be a trend developing in the crude/base oil spread. Specifically, the average spread has increased over time. As shown below, whereas the spread was roughly $1.00 a gallon from 2004 to 2006, it ramped up to what is now close to $1.70 a gallon for Group II 100N on the spot market.

  Click here to for larger image

Assuming this trend continues, it has important implications for finished lubricant blenders and marketers. Because if the base oil producers sustain continuous growth in the crude/base oil spread, finished lubricant blenders and marketers will be challenged to do the same with the base oil/finished lubricant spread.  If they don't, as the spread gets wider, their margins will shrink.

Click here to let us know what you think.

• Is WTI the representative crude oil price indicator to a base oil producer, or is Brent better?
• Is Group II 100N the best indicator to use when looking at spreads?
• And...if the spreads are spreading, why are base oil prices continuing to increase?

Note: As a service to our readers, JobbersWorld will provide the base oil spreads in each issue of our publication.

Whereas Chevron surprised many last week when it announced an increase on base oils, Holly did the same today. Effective April 6, 2011, Holly will increase prices as follows:

SN70: $0.22

SN100 to 150: $0.38

200 to 350: $0.46

500 to 600 $0.43

Chevron Introduces New Delo^® Grease ESI

Chevron Lubricants, maker of the Delo^® brand of technologically advanced engine oils, lubricants and coolants, today introduced the latest member of its product family, Delo Grease ESI. This extended service interval (ESI) grease is engineered to reduce friction and wear and is designed for a wide variety of on-road and off-road equipment applications. With the ability to extend service intervals up to and beyond 30,000 miles*, the new grease delivers optimum protection while minimizing downtime.

According to Chevron, Delo Grease ESI is ideal for Class 6-8 trucks, protecting equipment in a diverse range of applications, including wheel bearing, chassis, steering drag links, kingpins, shackle pins, transmission cross shaft spring pins, brake cam shafts, and fifth wheel faceplates and pivots operating under high and low temperature conditions.

"Time spent in the shop on maintenance is lost income," said Len Badal, Commercial Sector Manager, Chevron Lubricants. "The extended service interval capabilities of Delo Grease ESI, matched with other Delo products like our Extended Life Coolant, Gear Lubricant ESI, Trans Fluid ESI and Delo 400 LE 15W-40 allows our customers to safely protect their equipment while maximizing uptime and profitability."

Key benefits of Delo Grease ESI include:

·        Extended Service Protection to 30,000+ miles*

·        Extreme pressure high load carrying capacity

·        Excellent corrosion and wear protection

·        Excellent resistance to water washout

·        Excellent high temperature stability

·        Good low temperature pump ability and torque

For more information on Delo Grease ESI, go to www.DeloPerformance.com

Ultrachem has developed a new line of Omnilube® food-grade rotary screw and reciprocating air compressor lubricants with greatly improved wear, oxidation and lubricity vs. currently available H-1 food grade synthetic lubricants. Field tests have shown these lubricants - Omnilube® 32/46, 68, and 455 - to outlast other synthetic H-1 lubricants by 50% to 100%. Omnilube® food grade products meet all of the requirements of the USDA and FDA H-1 regulations, 21 CFR 178.3570, and conform to the requirements of NSF. They are also approved by the Orthodox Union for Kosher use.

Ultrachem will be exhibiting Omnilube® and other premium synthetic lubricants at Hannover Messe (ComVac), April 4-8, Hall 25, Stand A65.

Fluid analysis provider POLARIS Laboratories™ has officially launched HORIZON® 4, its newest version of the web-based data management software application that has been the company's comparative advantage in the marketplace for the past decade.

Chief Executive Officer Bryan Debshaw said the new platform is a collaborative effort between customer and laboratory. "HORIZON® 4 combines the speed and functionality customers have been telling us they need from a fluid analysis management software with our experience as a laboratory in developing intuitive, web-based tools for implementing maintenance strategies," Debshaw said. "HORIZON® 4 is designed to help them effectively execute those strategies in the face of competing priorities."

One of the application's most dynamic new features is a customizable dashboard. "Through the dashboard, users can monitor key program performance indicators at a glance and get access to their favorite data management reports in just one click," Debshaw said. Navigation throughout the application is much simpler as well and filtering and sorting options are now significantly more extensive.

"Users can also input missing information while viewing fluid analysis reports onscreen and immediately request a re-evaluation of the data," Debshaw added. "This interactivity allows the laboratory to make a more thorough, accurate, in-depth analysis of the sample in much less time."

See www.polarislabs.com for more info.