Watching the Spread
The price spread between crude oil (WTI) and base oil (100N Group II) averaged $1.30 a gallon from January 1, 2017 to May 15, 2018. What this means is that if crude was trading at $x/gal, on average, base oil would sell for “x” plus $1.30/gal during that period. Generally, for base oil producers, the greater the spread the better the day. This is because when the spread is high, base oil producers enjoy higher margins. When it’s low, not only do they see lower margins, they feel pressure from their upstream refining businesses to increase the price of base oil or run the risk of alternative value economics favoring the use of base oil feed to produce fuels rather than base oils.
Base oil spreads are important to watch. The spreads provide lubricant blenders and marketers with a predictive tool to forecast movements in base oil and finished lubricant prices. In some respects, spreads can be looked at as an early alarm. Because when the spread drops below a certain threshold, we typically see base oil prices increase, which in turn, result in price increases on finished lubricants.
There have been two periods with notable increases in the crude and base oil spread in 2018, as shown below. These were accompanied by a number of base oil price increase announcements and, not surprisingly, they were followed by announced increases in the price of finished lubricants.