DUBAI, U.A.E. – Crude oil price expectations remain high, WTI prices will bounce back (sorry, HollyFrontier), and API Group I production costs will continue to set the base oil pricing floor, according to Purvin & Gertz.
Blake Eskew, senior vice president with Purvin & Gertz in Houston, highlighted the impact of crude oil and other factors on base oil pricing, with a look ahead at how those factors might evolve, at the ICIS Middle Eastern Base Oils & Lubricants Conference here last week.
Since January 2009, crude prices have made a steady climb, peaking in March and April of this year, Eskew noted. Have they started to fall, or is it just WTI?
The worlds crude capacity cushion is small. The world is tight, he said, and OPEC will supply most of the future growth. With Brent and Dubai crude well over $100 per barrel despite economic worries and the Eurozone crisis, the Nymex contract price on the U.S. benchmark WTI crude is disconnected from the rest of the crude oil world. WTI collapsed like a rock.
WTI moved from a small premium over Brent, to $25-plus per-barrel discounts, and it moved from a small discount to Gulf Coast Light Louisiana Sweet to similar $25-plus discounts. Despite its Nymex role, said Eskew, WTI is a local Oklahoma-West Texas crude. The pipelines that used to move it to the U.S. Gulf Coast are all shut now, leaving the WTI region oversupplied. That is combined with shale oil and Canadian crude, further depressing the price of WTI.
This results in a big advantage to the single U.S. base oil producer using WTI, Eskew pointed out. The HollyFrontier plant in Tulsa, Okla., has an enormous benefit. But new pipeline capacity is expected beginning in 2013, so those WTI discounts should close.
Its not just crude
Crude prices are absolutely the single greatest influence on base oil prices, and the base oil market has become more responsive over time, Eskew continued. The historic base oil lag of several months has narrowed in recent years. Since early 2008, that lag has shrunk to just two months.
However, its the total cost of production, not the price of crude alone, that is the fundamental driver of base oil prices, Eskew said. This includes feedstock costs (and competition from fuels refining for those feedstocks), and both energy and non-energy operating costs, less offsetting gains from any byproducts.
The cost of production is very high now, said Eskew. The total cost of production at a smaller, higher-cost API Group I refinery has risen from around $200 per ton of base oil produced in 1995 to some $1,100 per ton of base oil in 2011. Group I costs will continue to set the base oil floor, he said. The marginal plants influence prices.
The base oil market is evolving. The Middle East is emerging as a new global supply hub, and over 7 million tons per year of high-quality base oil capacity will come on stream through 2015. This will put pressure on Group I vs. II/III price differentials. But upward cost pressures are still in place for crude, and base oil fundamentals will move with crude, Eskew concluded.