ICIS Base Oils has released a white paper describing the impact of plunging oil prices. In this paper, ICIS states that there are signs the fall in crude oil prices from the peak of $115/bbl last June to a present level just below $50/bbl may continue, with $30/bbl a possibility, but others regard a recovery to the $70/bbl level as not impossible in the not too distant future. ICIS believes that for base oil producers, buying interest remains widely stalled, as both buyers and sellers try to gauge a bottom point in the upstream side.

Oversupply, especially as the US gears up shale oil output; sluggish demand growth; and the withdrawal of price support from the financial system lie behind the rapid price drop says ICIS. But this is being exacerbated by the fact that the major oil producers in OPEC have decided not to cut back production.

According to the EIA, US oil production has grown rapidly over the past several years, showing a rise from 5.6m bbl/day in 2011 to 7.4m bbl/day in 2013. It is forecasting 2015 average production at 9.5m bbl/day. Saudi Arabia continues to show no inclination to cut production despite clear signals that demand is waning at a time of a supply glut. Saudi Arabia’s oil minister maintained recently that OPEC would not cut production even if oil falls to $20/bbl.

Disappointing economic data coming out of China point to a further weakening of crude demand says ICIS. The country continues to exhibit signs of weakness in industrial production.

 

According to ICIS, the longer-term impacts on the base oil market are difficult to elucidate precisely. In the short term, base oil producers may even benefit from improved margins as base oil prices slide less quickly than crude. This price drop delay is more pronounced the further down the chain you go, so lubricant distribution players may find they have a more profitable time ahead for some time.