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A Record-Breaking Pace of Price Increases

On average, lubricant marketers announce two price increases a year and there have only been a few years that topped out at three. This year, however, is unprecedented. With close to four months behind us, there have already been three price increases and another set to take effect at the beginning of May. And considering that yesterday ExxonMobil announced a base oil increase set to take effect April 30, there are likely more lubricant price increases in the wings.
 
Understanding what’s driving the price increases in 2021 starts with a look back at 2020.
 
Like many years prior, the first lubricant price increase in 2020 was seen at the start of the year. The increases came when the rising price of crude oil lifted base oil prices. But before some of the finished lubricant price adjustments took effect, Covid-19 hit. With that, the price of crude dropped into negative territory the week of April 20, 2020, and demand for lubricants also tumbled. Consequently, base oil prices retreated and most of 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. But, with demand for finished lubricants down as much as 30% due to the pandemic and the intensity of competition fierce, many marketers adsorbed this base oil increase. 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, many marketers held back and absorbed the higher cost until the second round of base oil increases were announced. And they were.
 
CLICK TO ENLARGE

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.

While many marketers shouldered the first round of base oil increases, absorbing the second would have been a perilous financial challenge. With that, most announced lubricant price increases taking effect in September. This was the first and only lubricant price increase in 2020 that stuck. Base oil prices, however, had one more left and producers moved up another 20 to 25 cpg in December. This set the stage for the first lubricant price increase in 2021.

At the close of the year and early in January of 2021, announcements were hitting the streets that lubricant prices were moving up by as much as 15%, with most in the range of 10 to 12%. The majority of the increases took effect end January into early February.

This is when it got interesting.

The first base oil increase in 2021 came just days prior to the effective date of many of the January lubricant price increases. While some lubricant marketers implemented their first round of price adjustments in 2021 in response to the last base oil move in 2020, others revised their first announcements to make adjustments for the combined impact of the last base oil increase in 2020 and the first in 2021.

If that wasn’t enough for marketers to manage, two more base oil price increases came in March. The first at the beginning of the month and the second at the end. Each moved the price of base oil up by roughly 40 cpg and spurred two more lubricant price increases. The first took effect early in March and the next set to take effect early in May.  When taken together, they moved the price of lubricants up by $1.25 to $1.65 a gallon.  

Why so many base oil increases?

In short, although higher base oil prices in 2021 have been influenced by the higher price of crude, tight supply of base oil is also a significant factor in driving base oil prices up. The supply of base oil took a hit from several events. One was the cutback in vacuum gas oil (the feed for base oil) production that occurred when refineries trimmed fuel production in an effort to adjust to sharp declines in gasoline and jet fuel demand during the pandemic. Another significant factor was the historic ice storm that hit the Gulf Coast region in February that knocked a number of refineries off line for an extended period of time. In addition to cutting into base oil supply, the ice storms impaired feed for lubricant additives, and disrupted some lubricant additive manufacturing. Further, the pandemic as well as seasonal turnarounds in Asia also disrupted the global supply and demand balances for base oil.

Importantly, however, while base oil has been the primary driver responsible for the unprecedented number of lubricant price increases seen to date in 2021, other factors have also been a significant contributor to the run-up. One example is seen in the price of additives. Where its relatively common to see one lubricant additive price increase a year, there was one round of additive increases announced late December/early January 2021 and another in the second half of March. Both increases were in the range of 8%. In addition to these increases, marketers incurred significantly higher costs for plastic resin and corrugated used for packaging lubricants; and freight, manufacturing, and insurance costs also increased.

Adding to the cost burdens, it’s been very challenging for blenders to source base oil and additives (particularly drive line) due to weather related force majeures and other issues. As a result, in addition to higher prices, some lubricant manufactures have placed customers on allocation. These actions also influence the price of lubricants.

So, where the price of lubricants is tied to the cost of base oil and the cost of base oil is tied to the cost of crude, this year is showing just how important a perfect storm of base oil supply and demand imbalance, weather, and unforeseen factors like the pandemic and other events can be in driving the costs of all inputs that drive the price of lubricants. And in the process, many lessons are being learned about managing business during these unprecedented times of cost and price increases.

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