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January 21, 2015

Volume 17 Issue 52

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Four More Majors Cut Lube Prices

Four more major oil companies notified U.S. customers of finished lubricant price cuts effective from mid-January through mid-February, as the recent drop in crude oil and base oil prices continues to impact the market.

Most companies indicated in their notices that the price increases could fall outside the specified amount, depending on the product. Some notices cited decreasing raw material costs’ impacts on manufacturing and distribution costs as a key factor. 

  • Citgo informed customers it would reduce finished lubricant prices for the Citgo, Mystik and MileMaster brands up to 5 percent, which became effective Jan. 16.
  • Shell notified customers it would implement a price decrease of up to 3.5 percent that went into effect Jan. 19. “This adjustment is the result of competitive factors in the marketplace, including the decreasing costs of raw materials used in the production and delivery of our products,” the company said in its notice.
  • Valvoline advised customers it would cut prices by up to 3.5 percent effective Feb. 2. “This price adjustment is a result of falling raw material costs associated with manufacturing and distribution,” the company stated said in its letter.
  • Castrol Lubricants told customers it would reduce prices up to 3.5 percent on some of its passenger car, commercial and ancillary products effective Feb. 16. 

Previously, ExxonMobil sent notice it would decrease prices by up to 3.5 percent on branded and unbranded lubricants and greases effective Feb. 2. Phillips 66 Lubricants plans to decrease posted prices up to 4.5 percent for most of its finished lubricant products effective Feb. 2. Chevron notified U.S. customers that prices for its branded finished lubricants, gear oils and greases will generally decrease by up to 3.5 percent effective Feb. 6 for most SKUs

One industry source suggested oil majors couldn’t in good faith hold out any longer, given the dramatic drop in prices for the component – base oil – that comprises upwards of 90 percent of their product cost. He noted that official, across-the-board price decreases are a rarity in the lubricants industry and that majors don’t seem to like to lead on them. In contrast, in an escalating price market, this source observed, there seems to be a mad dash to be first to recoup rising costs.

Another industry source opined that the decrease is long overdue but considered the amounts disappointing, considering how much base oil prices have decreased since July last year. This source suggested that if the base oil prices had increased by the same amounts, the ensuing finished lubricant price increases by oil majors would likely have been far more substantial and would have come much sooner.

Industry analysts familiar with the U.S. lubricants market agree oil majors may be hesitant to give back too much of the benefit from decreased base oil prices through deep finished lubricant price cuts, though changing market factors could push them in that direction.

“Our view is that finished lubricant prices tend to be relatively sticky in the downward direction, as oil majors hesitate to give up the improved margins they enjoy when the costs of their inputs are low,” Jason Carnovale, analyst for Cleveland-based market research firm Freedonia Group, told Lube Report.

Carnovale noted that the finished lubricant price decreases by majors have lagged declining base oil costs over the past several months. “That prices are now beginning to come down for finished lubes is indicative of a growing expectation that crude oil and base oil prices may remain low for a significant period of time,” he suggested. 

Competition between suppliers to sustain or increase market share amid reduced base oil costs could drive majors to continue decreasing finished lubricant prices, he said. “As a result, if crude oil and base oil prices remain low for an extended period of time, supply and demand factors will begin to have a larger impact on the finished lubricant market than they have thus far,” Carnovale added.

“Additionally, the impact of lower priced base oil on finished lubricant prices will be less significant for specialty or premium products, and synthetics in particular,” he said. “Market prices for additives and synthetic base fluids (excluding Group III oil) obviously do not have the same sensitivity to falling crude oil prices as Group I to III oils do, although there is some carryover.”

George Morvey, industry manager for Parsippany, N.J.-based Kline & Co.’s Energy Practice, said an operator of a large vehicle fleet is probably the type of end user most likely to realize a price reduction on products such as a gallon of bulk motor oil.

“They probably have some influence over their suppliers to demand a decrease in their price of bulk engine oil, for example, because they buy so much of it, and they see how the price of crude and corresponding diesel is declining,” Morvey told Lube Report. He noted that a large buyer such as a large trucking company – already seeing large drops in diesel fuel prices – is in a better position to demand and get price decreases in their delivered engine oil than a consumer going to a car dealer or quick lube for an oil change or buying engine oil on the shelf at retail.

He said that at retail, some big auto parts retailers may drop the engine oil prices per quart or five quart jug a little bit in response to oil majors cutting prices. “But I think part of the supply chain will probably try to get as much financial gain out of this as they can,” he noted. “I would suspect everyone is trying to get as much financial benefit out of it as they can. The majors are trying to hold back as much as they can, before they have to start passing it along. You can argue customers of distributors will say the same thing.”

The lubricant price cuts are unlikely to have much impact at the consumer end user level, Morvey said. So if a regular oil change costs $24.95 now for a consumer passenger vehicle, it’s unlikely to drop substantially any time soon. “I think we’ll be paying $24.95 for a long time,” he added.