What's Driving Base Oil Prices?          

As lubricant marketers are all too well aware, when the emails/letters arrive to advise about finished lubricant price increases, the reasons given for the increases are usually the same. That is, they are due to the higher cost of base oils and additives. Further, the higher cost of these raw materials is due to the higher cost of crude oil. This makes sense since the cost of base oils and additives is, in a large part, driven by the cost of crude oil.

But the last round of finished lubricant price increases has many scratching their heads. This is because the price of crude did not increase over the past few months. Instead it has been trending down; yet, there has been no downward movement in the price of base oils.

So what are marketers being told by the majors to explain this?

Although most marketers say they have not heard much if anything to explain the stubbornness of base oil prices, some say they are told the apparent disconnect in the last round of lubricant price increases to the price of crude is due to changes in how refiners index prices. Long story short, they are told WTI has become an unreliable indicator of crude oil prices in the Gulf Coast due to an over supply of Canadian crude (tar sand derived) flooding into Cushing, OK. Because of this oversupply, WTI prices at Cushing are deeply discounted and not indicative of what refiners pay for the crude used at Gulf Coast refineries. As a result, whereas WTI used to drive base oil prices, today it's tanker borne Brent and LLS that drive base oil prices. This too seems to make sense when one looks at how the price of Brent has diverged from the price of WTI over the last year and a half, see chart below:

At the same time, in the minds of many, this explanation remains challenging to understand. This is because whether one looks at WTI or Brent, the spread between either of these crudes and the price of base oil continues to increase, while base oil prices have remained static over the past few months, as shown below:

Adding to the questions, is the responsiveness of gasoline and base oil prices to crude. As shown below, whereas gasoline prices have tracked crude oil prices both up and down for many years, base oil prices seem to have disconnected from both WTI and Brent prices over the past few months.

This is not to say that base oil prices should track crude oil prices. Instead, it says that if the justification for finished lubricant price increases are said to be driven by the higher price of base oil, and the higher price of base oil is driven by the higher price of crude oil, the math needs to work. And in the minds of many marketers and independent lubricant manufacturers, the math currently seems a bit sketchy.

Because - marketers ask, whether its WTI or Brent, how is it that the price of crude has been dropping while the price of base oils remains the same?

So let's assume the price of base oils are uncoupling from the price of crude; if true, where are base oil prices heading?

One way to predict the future price of base oil is to look a linear regression of historic base oil prices. In doing so, if one examines prices from September 2005 to current, the price of 100N Group II is projected to reach close to $4.50 a gallon by 2014. This projection, however, includes the steep rise and fall of base oil prices during the period between the 4th quarter of 2007 and the 4th quarter 2008. But, based on where base oil prices are currently, it's unlikely such a forecast will come to fruition. At the same time, some might argue such prices are possible in light of the new capacity expected to come on stream in the next three years. 

 

Another scenario, however, is one based on the trend line for base oil prices over the past two years. This trend line excludes what appears to be an anomalous spike in base oil prices in 2008. In addition, it assumes base oil prices are in fact uncoupling from that of crude and there is a shakeout of suppliers after the new capacity comes on stream. A forecast based on this scenario has the price of 100N Group II reaching close to $7.50 a gallon by 2014.  

But as with most things in life, it's unlikely either extreme will end up being a reality. Instead, it will likely end up some where in between as the price of base oil fights its way, away from the price of crude and the anticipated overhang in supply as new capacity comes on line.

According to a study by the Automotive Aftermarket Industry Association (AAIA), engine oil is recycled by 95 percent of auto repair shops and the parts stores that accept used engine oil.

"Auto repair shops and parts stores have, for a very long time, taken great care to protect the environment by recycling used engine oil," said Rich White, executive director, Car Care Council. "It's part of their everyday business."

As estimated 1.3 billion gallons of motor vehicle engine oil is generated each year from oil changes performed primarily at repair shops or by do-it-yourselfers. Fortunately, the majority of used oil is collected and sold as combustible fuel, mainly used for energy for power plants and heating. About 16 percent of used engine oil is re-refined into new oil.

Oil that is dumped on the ground or into the sewer system, rather than properly collected and recycled, can contaminate drinking water, and 40 percent of the oil pollution in our nation's harbors and waterways is a result of improper collection, disposal and recycling of motor oil.

In addition to recycling used engine oil, auto repair shops recycle tires, used oil filters, batteries, parts cleaning solvents, scrap metal, plastics, cardboard and paper, dunnage and wood pallets.

 For more information, visit www.aftermarket.org/green.