In part one of this segment, I explained the adverse effect hurricanes Ike and Gustav had on U.S. base oil production capacity. I also took a minute to go over the definitions of the different classifications of base oils. While the dent in supply caused by the hurricanes was a major factor that influenced price increases, the storms were not the only culprit.

Before any storms hit the Gulf coast this year, U.S. base oil inventories were already quite tight. This is partially the result of the higher profit margins diesel fuel was yielding toward the beginning of the year. Oil companies had been diverting crude oil away from base production and the building of base inventories in order to process more diesel.

To make things worse, Citgo and Marathon both announced they would be exiting base oil market earlier this year. This not only caused a drop in supply, but also resulted in a loss in market competition that is allowing the remaining players to hold pricing above what would seem to be fair market value. In the “Hurricanes Sap Base Oil Supply” article from Lubes ‘N’ Greases magazine I referenced last week, an independent blender is quoted saying:

“We’re seeing tightness, yes-including the closing of Citgo’s refinery. That really hurts. More unfortunately, that let’s refiners keep base oil prices at a higher level than is justified by the price of crude oil. We’re still paying far over $4 a gallon, even with $93-a-barrell crude.”

An overall tightness from high diesel margins and a decrease in market players existed prior to any inclement weather. This tightness, coupled with the season’s “acts of God” created a perfect storm for price increases. Fortunately for blenders and lubricant customers, a natural seasonal lull generally occurs during the months of November and December. After this month, most oil companies should have had ample time to replenish their supplies of base oil and, if the logic follows, we should begin to see lubricant prices begin to fall along with the price of crude oil.

Referenced in parts 1 & 2
“Hurricanes Sap Base Oil Supply”. Lisa Tocci. Lubes ‘N’ Greases. Volume 14 Issue 11.
Wikipedia. Com-Keyword Lubricant.
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Steve Tatum

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