Spend Matters welcomes this guest post from Verity Michie, market analyst at Mintec.
Using a vehicle day in, day out can sometimes be taken for granted, but do we actually understand the ins and outs of them? When thinking about the cost of running a vehicle, we tend to think of fuel, tyres and servicing, but we are less likely to think of metal processing fluids and lubricating greases; nevertheless, they are important. These fluids and greases are made from base oils, which are derived as by-products of refining crude oil. Did you know that something as crucial as engine oil for your car is made from around 80%–85% of base oil?
Base oil prices in the U.S. fell 56% at the start of 2016 from the peak in 2011, mainly due to the sharp decline in 2014 in line with crude oil. In January 2016, crude oil prices fell below 30 USD/bbl for the first time in 12 years, due to an oversupply on the global market for two consecutive years.
Prices generally rose, however, throughout 2016 for the first time since 2010, and are currently up 30% year-over-year. Prices rose last year, driven by the increase in crude oil prices fueled by the prospect of production cuts, which were agreed to later in November. However, although crude oil prices have stabilized since the start of 2017, base oil prices have risen 4% during the same period, driven by an increase in demand.
Demand for base oils in the U.S. usually increases this time of the year, as a result of a pickup in motor oil and engine lubricant requirements as drivers prep their cars throughout the winter. However, this year, interest from base oil buyers is stronger than usual as they purchase ahead of planned factory outages in March, which are expected to cause a tight supply situation. Plant maintenance turnarounds are believed to include a plant in Mississippi and one in Louisiana.
Base oil prices are expected to fall back when manufacturing units are switched back on. On the demand side, however, decisions by President Trump to sign executive orders authorizing a U.S.-Mexico border wall are likely to ruin relationships with Mexico, which is a major importer of U.S. base oil. In fact, Mexican buyers are already considering alternative markets for base oils. Overall, the future for base oils looks like a rather greasy and slippery downward slope.