When your base oil supplier makes a pricing adjustment, what drives this change?
It would be nice if the answer to this question was a simple summary of a few common reasons.
But in reality, there are hundreds of factors that drive oil pricing changes, starting at the beginning of the supply chain: crude oil production.
Factors that Drive the Price of Crude
Base oil suppliers set pricing based in part on the price of our core raw material, crude oil.
Though base oil pricing doesn’t fluctuate nearly as often as crude for the reasons explained below, significant trends do have a ripple effect throughout the supply chain.
Many factors drive these trends. Some are predictable economic principles. Others are quite unpredictable, making crude oil among the most volatile commodities on the planet.
Economic Factors
Market speculators can make educated guesses about the direction oil prices will take by building models based on historical data and textbook economic principles.
Supply & Demand
In theory, as the global supply of any product increases or demand decreases, the price should go down; and as demand rises or supply decreases, the price should increase.
Oil is somewhat subject to this basic law of economics. Crude oil prices might behave much like other commodities – if it weren’t for other factors that complicate the picture.
Cost of Production
This is another somewhat predictable factor, as production methods are fairly standard. Some of the typical costs involved in producing crude oil include:
- Oil deposit scouting
- Drilling exploration wells
- Building the drill site
- Equipment purchasing and maintenance
- Transportation
- Regulations and governmental fees/taxes
While these costs vary by country, global averages aid the calculation of the average price of crude oil per barrel.
Technological Advances
New technologies and methods that either reduce the cost of production or increase supply can bring the price of oil down somewhat.
Historically, the development of technologies like seismic imaging and horizontal drilling have helped oil producers explore new oil deposits and expand supply.
More recently, connected devices, artificial intelligence, and robotics are just a few new technologies oil companies are exploring to add efficiency and reduce production costs.
Other Factors
In addition, hundreds of other complex factors are at work in crude oil pricing that no mathematical model can fully interpret. Below are just a few.
Oil & Financial Market Trends
Oil market participants affect the price of crude oil in many complex ways that cause the price of crude to bend the basic rules of supply and demand.
One example is oil futures contracts, the right to purchase oil at a predefined price at a future date. When demand is down, contractual purchases can artificially prop up demand and prices.
Market sentiment also shifts prices. When speculators express a mere belief that oil demand will increase or decrease in the future, it can cause significant pricing fluctuations in the present.
Political Stability
As we saw in the wake of Russia’s invasion of Ukraine in February 2022, geopolitical events can have a massive effect on crude oil prices.
In this case, it was a steep increase that peaked around $120/barrel by May. At the time of writing, events in Ukraine continue to create market volatility and uncertainty.
Natural Disasters
Events like hurricanes tend to increase prices out of fear of reduced production. Katrina, for example, affected 25 percent of U.S. crude oil production in 2005, which in turn sent prices up briefly.
The Covid-19 pandemic had a far greater impact, of course. It sent demand for oil plunging as commerce came to a screeching halt across the world, causing a significant price drop between January and April of 2020.
How Base Oil Suppliers Maintain Pricing Stability
These and many other factors are at work in the frequent fluctuation of crude oil pricing and its most in-demand derivative, petroleum. Thankfully, base oil suppliers and our customers have some protection from oil market volatility.
Our refinery partners draw from decades of experience gauging the oil market to set stable pricing floors that are conservative enough to stay above the volatility.
In turn, base oil suppliers have fewer cost variables to factor into our pricing, such as storage, quality control, energy cost, and transportation, all of which are far more stable than crude barrel pricing.
When we do have to make pricing adjustments, it is most often due to a sustained period of rising or falling prices that have affected our refinery partners.
In other words, no one factor will affect the cost of base oils, food-grade white oils, isoparaffins, process oils, and other specialty oils derived from crude oil.
With a responsible base oil supply partner as a pricing buffer, it usually takes hundreds of factors working in the same direction to eventually affect the price you pay.
Cost Containment with Your Base Oil Supplier, Signal Fluid Solutions
Like all base oil suppliers, we can’t control the cost of crude oil or related factors, such as the fluctuating price of diesel and its effect on transport costs.
But here at Renkert Oil, we do practice cost containment strategies that keep our prices competitive and your bottom line healthy, such as:
- Working with refinery partners that price products responsibly.
- Best-in-class logistics for on-time and on-budget delivery.
We want to help your business be more profitable and successful. Contact us today to inquire about making Signal Fluid Solutions your trusted partner in specialty oil supply.
