Why the Price Increases?
There have been 21 times over the past 10 years where lubricant price increases have been announced. Over that time there have only been two announced price decreases. On average these increases represent close to two a year. But, as shown in the chart below, there have been a few years where the frequency of increases was one or two a year, and in 2015, when the price of crude oil, and consequently base oil, dropped significantly, there were no increases and one announced price decrease.
Importantly, although there were only two announced price decreases over the period, many of the price increases did not stick over time. This is due to competitive forces that result in informal decreases between increases; for example when there is a notable spread between spot and contract base oil postings. Had all the announced price increases and two decrease since 2010 stuck, today’s PCMO prices would be roughly $7.50 or 130% a gallon higher than those seen in 2010, and they clearly fall far short of that.
Lubricant price increases, and the few decreases that we have seen, typically track significant movements in base oil prices. This is understandable since base oil accounts for 80 to 99% of most finished lubricant volume.
Crude oil prices are one of the primary factors driving base oil prices and the reasons for fluctuations in the price of crude, and therefore base oil, are many. They include OPEC pricing, global supply and demand, geopolitical unrest, natural disasters, accidents, production costs and storage capacity, power outages, plant turnaround, and others. Whereas some of these factors can be attributed to a drop in the price of crude and base oil that started to race down at the beginning of the year and reaching record lows towards the end of April, the combined impact of these factors was dwarfed by disruptions in the supply chain and step declines in demand brought about by Covid-19. The lock downs and travel restriction brought the economy to a near standstill and lubricant demand took a significant hit.
So, what is the reason for the recent round of lubricant price increases?
The answer, in a large part, becomes clear when one looks at crude, base oil, and finished lubricant prices over the past two years. Although the price of crude dropped rather sharply in the first quarter of 2019, it quickly recovered and began a modest upward climb. In response, most lubricant marketers announced price increases that took effect mid-year 2019. This was the only increase announced that year.
The next increase came at the start of 2020 when most finished lubricant suppliers announced increases scheduled to take effect at the end of February/beginning of March. These increases came in response to rising crude oil prices and a bump in the price of base oil. But before some of the finished lubricant increases took effect, Covid-19 hit. With that, the price of West Texas Intermediate crude dropped into negative territory the week of April 20, 2020 and demand for lubricants tumbled. Consequently, base oil prices retreated and the finished lubricant increases announced at the start of the year were pulled back.
The precipitous drop in the price of crude, however, did not last long. Following its low at the end of April, crude began an upward climb and this triggered increases in the price of base oil. The first cluster of base oil increases were kicked off by Motiva in mid-June when it announced a hike of $0.15 a gallon; others followed.
Many blenders adsorbed these base oil price increases due to the intense competition brought about by the significant contraction in finished lubricant demand resulting from the pandemic. In addition, there was word on the street that another base oil price increase would likely soon follow to bring base oil prices back in line with the increase in crude.
Rather than trying to manage two finished lubricant price increases in a short time frame, most blenders held back and absorbed the higher cost until the second round of base oil increases were officially announced. And they were.
A second round of base oil increases in 2020 started in August when ExxonMobil and others announced. This was followed by Motiva announcing an increase taking effect on September 7th. Motiva’s increase moved 100N up by $0.15 a gallon, and 220 and 600 up $0.25 and $0.20, respectively.
Although many blenders shouldered the first round of base oil increases, absorbing the second would have been a significant and dangerous financial challenge for blenders to manage. With demand for lubricants significantly down and intensity of competition exceedingly high, margins were already paper thin. When you consider that the price customers were paying most of this year for lubricants was tied to base oil prices when crude was roughly $15.00 a barrel, this recent round of finished lubricant price increases comes as no surprise.