JobbersWorld is a Petroleum Trends International, Inc. Publication
JobbersWorld is a Petroleum Trends International, Inc. Publication

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Diverging Indices - A Bitter Pill to Swallow

Although not necessarily related, today’s announcement that ALS is increasing the price of its synthetic lubricants is a good backdrop for a related story JobbersWorld has been working on. This story speaks to concerns JobbersWorld has been hearing from blenders about a divergence in the commonly used indices for Group III base oil prices, specifically Argus and ICIS Market prices and the ICIS average of contract price postings for four refineries.

According to a number of lubricant blenders, where these indices tracked fairly close in the first quarter of 2021, since then, they have shown notable separation. It has been observed that late in the Q1, the average ICIS Market prices for 4 cSt Group III base oil started to track significantly higher than the other two indices. The divergence occurred at the time the market tightened and non-contract (spot) pricing started to rise significantly.

Blenders say that early in the second quarter of 2021, Argus, which is understood to be heavily influenced by spot market pricing, started to track higher and closely with the ICIS average market price. In addition, the spread between Argus and the ICIS Market average price as compared to the ICIS average contract postings swelled to 40 to 50 cents per gallon. And with the latest Argus and ICIS average market price posting changes, blenders say the spread vs. the average ICIS contract posting has ballooned even further.
So, what does this mean for blenders?
To explain the impact the divergence of indices has on blenders starts with the understanding that lubricant blenders purchase base oils under contract, or on the spot market, and that contract base oil prices are often pegged to either ICIS and/or Argus postings. Where spot prices represent the current price at a given time and place in the market, the price of base oils purchased under contract typically move up and down in concert with changes seen over a period of time for a given index (i.e., ICIS, Argus). Unless a blender’s Group III pricing is solely pegged to changes in ICIS Contract Postings, and very few use just that one index, they are seeing large increases in contract pricing for synthetic base oil. 
Blenders say that this is a bitter pill to swallow, especially considering that they have been struggling all year to finally catch up on the steady rise in base oil and additive costs, resulting in what many say are the unsustainable margins seen year-to-date. At the same time, blenders’ customers can use the advance notice they are given by the blenders to raise prices to their customers before they absorb the higher costs and are thus in a better position to manage and maintain their margins. 
While today’s announcement that ALS is increasing the price of its synthetics may not be relevant to the divergence in Group III indices, one thing for certain is that blenders are feeling the pinch of higher prices when they purchase Group III base oils in today’s market. And if history repeats itself, as it so often does in the lubricants business, the pain of the pinch will be passed on at some point in time.  
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