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Base Oil Price Outlook

So here we go in what appears to be another round of base oil price increases. It started with naphthenic base oil, then Group I, and now we are looking at Chevron as the first to move in Group IIs.

So what does it mean, where are prices heading? Well if history helps predict the future, we have a good deal to draw from. To start, although there have been some asperities in base oil pricing trends, as shown below, the trend line is up.

The chart below forecasts base oil prices looking at historic data from 8/2004 to 3/2012. This time period includes the significant run up and down of base oil prices occurring in 2008 to 2009.

Whereas the chart above may be helpful in predicting base oil prices, more instructive could be the trend in prices prior to the significant rise and fall of base oil prices in 2008/09.

Based on a linear regression of prices from 8/2004 to 3/2008, one would have predicted in 2008 that the price of base oil in March 2012 would be at $4.60 a gallon. That prediction would be about $0.05 a gallon off from the actual price today. Assuming this trend line continues as a good predictor of future prices, base oil price (Group II 100) will reach $5.45 a gallon in Jan 2015, and close to $7.00 a gallon by 2018.

At the same time, it should be noted that base oil prices may have established a new trend line following the unusual run up and run down in prices that occurred in 2008/09. Since that time, the trend line has inclined. Assuming this is the new trend line, we could be looking at the price of API Group II base oil at $8.00 a gallon by the start of 2015, and just under $11.00 a gallon by 2018.

Forecasting the price of base oil can also be predicted by looking at a polynomial regression from 2004 to current. This analysis draws a smooth line in price progression that takes into account the peaks and valleys along with the linear changes in pricing.

Based on this analysis, Group II 100 base oil prices are forecast to reach $8.00 a gallon by 2015, and skyrocket to $11.00 a gallon by 2018.

But no matter how one looks at it, all the data points to a continuing rise in the price of base oils, and therefore, finished lubricants. True, we may see a decline in prices when the expected new capacity comes on stream. And you can be sure intermaterial competition between Groups I, II, III and others will help shape pricing by driving the price of some types and grades up and others down. But if history has taught us anything, these may prove to be no more than bumps in the long road up for base oil prices.

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