This quarter may look a little different for base oil buyers than what we’re used to seeing. While the summer months often see an uptick in demand, this year demand has been slower, leading some to think that the increase might not be as significant as in previous years.
This comes as crude oil and natural gas prices continue to rise.
What does this mean for our base oil customers? In this article we’ll go over the trends we’re seeing as base oil suppliers, the market forces behind them, and the implications for your business.
Suzanne Kingsbury, Director of Quality
Crude Prices Remain Up
From December to April 2024, the Brent crude oil pricing benchmark rose by nearly 20 percent before beginning to slow again in June. Brent futures were hovering around about $80 (with West Texas Intermediate prices just a few dollars lower).
Geopolitical Tension Is Causing Uncertainty
Part of this price increase comes from investors pricing in the risk created by geopolitical upheaval.
The Russia-Ukraine war has affected oil prices significantly. As Russia is the second-largest oil producer in the world, its shifting alliances and the sanctions imposed as a result of the conflict have had significant downstream effects on oil prices.
According to one study:
“Event analysis reveals that the Russia–Ukraine war and its subsequent events amplified the high-frequency fluctuation of crude oil prices, resulting in an increase of $37.14, or 52% (WTI), and $41.49, or 56% (Brent). The Russia–Ukraine war accounts for 70% of the fluctuation in WTI crude oil prices and 73.62% of the fluctuation in Brent crude oil prices during the event window while also causing a fundamental shift in the long-term trend of crude oil prices.”
OPEC+ Rations Supply
At the same time, the policy of OPEC+, made up of the Organization of the Petroleum Exporting Countries (OPEC) and other major oil exporters including Russia, has been to cut supply. This policy began in 2022, but Q2 2024 announcements extend the cuts into 2025.
According to Saudi Energy Minister and Prince Abdulaziz bin Salman, “We are waiting for interest rates to come down and a better trajectory when it comes to economic growth.”
These supply restrictions also place upward pressure on oil prices, which will continue in the immediate future.
Base Oil Demand Is Lower Than Expected
In addition to rising crude prices, base oil suppliers have noticed a slump in the demand that normally precedes the summer months when people start driving more. There are multiple reasons for this.
Abnormal Expenses
One reason is that worldwide conditions have made it more expensive to produce and transport base oils.
Attacks by Houthi rebels in the Red Sea are forcing ships to stop using the Suez Canal and start navigating around the Cape of Good Hope, lengthening trip times, decreasing vessel space, and raising transportation prices.
The market is also responding to disruptions in the Panama Canal, which near the end of 2023 experienced lower shipping volumes because of low water levels.
Changing Uses of Base Oils
Others suggest that less-than-expected demand is a natural consequence of the changing relationship between lubricant producers and the increasingly large share of hybrid and electric cars on the roads.
This comes as vehicles extend their oil change intervals and lubricant producers shift towards an emphasis on applications with components such as door locks, wheel bearings, and hinges.
What Do These Market Conditions Mean for You?
Keep these three tips in mind during this slower-than-normal period.
1. Don’t worry too much about volatility.
While crude prices can have an effect on the prices of derivative products like base oils, base oil suppliers are a few steps removed, insulating customers from price volatility.
Refiners (base oil producers) absorb and limit the volatility of prices to their customers to prevent see-saw demand, which does not easily match steady-state refinery production. Rather than daily price changes, they average five changes per year. This stabilizes industry demand.
2. Take advantage of the slow period.
Assuming that this lower demand period continues, buyers are in a comfortable position going into the summer months. They have the flexibility to shop around for new base oil supplier partners that can better serve their needs when the market heats up again.
For example, some firms may treat a low-demand season as an opportunity to develop relationships with a secondary supplier. By building these relationships during a calmer period, they’ll be prepared when more hectic times come in the future.
3. Take action before hurricane season heats up.
It’s worth noting that this summer may not be completely calm. The beginning of hurricane season is another reason to make sure you have strong relationships with suppliers who can help add redundancy and security to your supply chain.
Consider Building a Relationship With Renkert Oil
Renkert has decades of experience in the base oil business. Our expertise covers the technical details of a wide variety of base oils and the often complex logistics of the market and the supply chain.
From that experience, we know that above all else, this is a relationship business.
At Renkert Oil, we pride ourselves on superior service. We take the time to meet with customers and develop a deep understanding of their needs. And we bring our industry expertise to those conversations to find innovative solutions.
It’s never been a better time to add Renkert Oil to your list of trusted base oil supply partners. Contact us today!