As reported by JobbersWorld over the last month, most of the majors and independent lubricant manufacturers announced price increase on finished lubricants taking effect this month and next. Whereas many marketers anticipated these increases were imminent based on the trajectory of crude oil prices since the beginning of the year, some are now questioning if the justification for the increases can be sustained in light of the fact that crude oil prices have been retreating over the last few weeks. As shown below, the price of crude is currently close to its low in 2012.

To understand the concerns about the recently announced increases in the price of finished lubricants, one needs to look back at what happened in 2011. This is when crude oil prices ramped up sharply in the first two quarters of 2011, and then softened and declined in the second half of the year. Whereas there were four rounds of price increases announced in 2011, the fourth, which was announced to take effect in the fourth quarter of 2011, lost its wind when the price of crude retreated, as illustrated below. In fact, some blenders even backpedaled on the increase and pushed through modest price decreases when crude oil prices dropped.

So the question on the minds of many at this time is whether the recently, and possibly continuing declines in crude oil prices could result in a repeat performance of what was seen with prices at the end of 2011?

The same question surfaces when one looks at the difference in the price of Brent crude as compared to the price of base oil (the spread). This spread experienced a significant decline during the first quarter of 2012. Compression of the spread typically means base oil producers are under pressure to move prices up, which they did in May. And as expected this triggered the first round of price increases for finished lubricants in 2012. But as shown below, the spread increased over the past two months due to a marked drop in the price of crude and increases in the price of base oils. This too leaves some wondering what’s next for base oil and lubricant prices?