In the Ukrainian market, wholesale prices for diesel fuel are declining actively, lagging behind the dynamics of falling oil prices by several weeks. Retail prices also declined. The main consumers of fuels and lubricants - farmers and transport workers put off until the last the purchase of diesel fuel and motor oils in the hope that each subsequent batch of purchases will be much cheaper.
Starting in December, this is exactly what happened with diesel. There was a seasonal (winter) falling in prices, which didn't turn into seasonal (spring) growth, but continued. As a result, the price of diesel fuel falls for the fourth consecutive month and the fall rate at the end of March increased. A good gift for sowing!
The wholesale price of motor oil behaves differently. Imported oils for agricultural machinery from the autumn until the beginning of April changed the price solely depending on the hryvnia exchange rate to the dollar (euro).
Wholesale hryvnia prices for domestic motor oils were stable throughout the winter, and by the end of March rose by an average of 6-8%, reflecting an active drop in the hryvnia exchange rate. There is no cost reduction yet.
So when the drop in oil prices will affect the prices of motor oil?
The price of motor oils is the sum of the cost:
a) base oils,
d) production costs,
e) distribution and logistics costs.
And now in more detail:
a) Based on the data of international quotation agencies (ARGUS MEDIA and ICIS LONDON OIL REPORT), prices for SN-150 and SN-500 base oils in the ports of Northern Europe and the Baltic Sea have remained unchanged (+/- 10 $ / t) over the past 5 months, despite the constant drop in oil prices.
Given the fact that base oils are not produced at all in Ukraine, analysts operate at wholesale prices in the hub closest to us - in the ports of the Baltic Sea. Suppliers of base oils are usually repelled from this price, forming a price for the Ukrainian market with a slight increase in prices from the Baltic, due to the lack of domestic supply.
The forecast from the end of March implied a reduction in prices of only $ 10 / t with oil supply at the end of April – mid-May (taking into account the time for shipment from the plants and movement along the railway)
The latest forecast from 4 April, 2020 gives another $ 20 / ton decrease with a weekly shift. Thus, the total reduction in the cost of bulk base oils that will arrive in Ukraine by the end of May may amount to $ 30 / t, or about 6% of the current base value in dollars. In terms of the wholesale price of motor oil in a package, this drop will yield no more than 3-4% with a minus sign.
If we consider the time-based graphs of the cost of crude oil and base oils for a long period (see the appendix), then it can be seen that the graphs for increasing and lowering the prices of oils are more gentle than the schedule of oil prices, and sometimes multidirectional. Why is that? Perhaps because the yield of base oils is only 1.5-2% of 100% of the weight of the refined oil and has little effect on the final oil refining economy. The price of base oils, rather, depends on seasonal demand or supply shortages of various types of bases in one part or another of the globe or the marketing policies of global manufacturers.
b) Additive prices are quite conservative. Additives are chemicals and compounds whose prices are not directly or indirectly related to the price of oil. Some large Chinese manufacturers of both finished additives and raw materials for their production, in March said that due to quarantine, they did not have time to comply with the annual delivery schedules. If global consumption of additives does not fall due to the crisis, they may be in short supply. Prices are still stable, but there is a real risk of their growth.
c) The cost of packaging (barrels, cans, lids, corrugated boxes, pallets, labels, etc.) remains stable today, however, when using imported raw materials, it is subject to fluctuations depending on the change in rate. It is possible to reduce the cost of packaging in the future for several months due to a possible decrease in demand caused by the crisis.
d) and e) Costs of production, distribution and logistics from domestic manufacturers are unlikely to fall or increase in the near future. For foreign goods, these components, as always, are tied to the hryvnia exchange rate.
The aggregate foreign exchange value of all components that affect the price of motor oils will remain fairly stable over the next 2 months with a slight downward trend, mainly due to a slight drop in the prices of base oils. A further reduction in the price of base oils (in June and beyond) will entail a reduction in prices for finished oils, but the process of cheaper on the domestic market of Ukraine will certainly not be quick, because There are many other multidirectional factors affecting the price of oil, especially currency risks.