Refiners are trying hard to prop up the levels, particularly through new contract business, but as we hinted last week, large discounting has been necessary to persuade end users to re-sign supply agreements covering the first quarter of next year. Many subjects, riders, and guarantees have had to be conceded by the producers on pricing, since most buyers are still looking for lower levels, but at the same time are becoming concerned about security of supply, seeing that in the medium and long term, with demand reducing, producers may cut back to a point where availabilities could be affected.

There are few signs of this happening as yet, but as industry demand projections are being reworked downwards, and forecasts for the first and second quarter of 2009 show limited or negative growth in all lubricant sectors, these fears may start to become reality.

In the API Group I arena this week, falling prices are still in evidence, but not to the extent that has been witnessed over the last month. Some sellers have dropped some $20 to $50 per metric ton, but mainly on a delivered basis, where freight discounting has allowed for concessions on price.

In the Middle East region, Iranian sellers have had to discount SN 500 by around $40/t to sell into India, but are still looking to keep CFR/CIF levels into the United Arab Emirates at circa the $500/t level. One interesting development in this area is that, as well as the normal cargo sizes, a large cargo of some 30,000 tons of SN 500 is being worked for delivery into the Emirates, and this may be a sign that inventories are extremely low, due to buyers having waited for prices to come down to buy replenishment stocks.

In the same region, payment terms have shifted somewhat from the existing traditional conditions, and cash payments are being used by sellers to avoidletters of credit and credit problems, and of course by buyers to obtain lower prices. The discounting granted for the sale into the west coast of India was justified on the basis of a cash sale.

Group II base oils, whilst maintaining their premium over Group I grades, have certainly fallen into line on pricing over the last few weeks, but this may also be an effect of increased competition entering the European market. The original core players have had this lucrative market to themselves since these grades were introduced, but now with more producers coming on stream, and looking for buyers outside their local domestic markets, we may see a battle looming for market share of Group II during the course of next year.

If ever Santa Claus was to bring a present to the producers, this must be in the form of bright stock. Even with prices falling some $500/t or more from all-time highs, bright stock continues to defy logic, and still keeps its distance from the solvent neutral grades in price terms. Bright stock is still commanding prices over $1,000/t FOB, although again, there have been rumoured talks to break through this psychological barrier.

This grade still provides very healthy netbacks for the refiners due to a number of reasons. The grade is relatively scarce, with few producers, and has a role in the blenders program which is not easily filled by substituting heavy neutral grades. Eventually the market will see the gap between this grade and other base oils narrow, but when?

The feeling in the market right now is that prices may be used to protect market share, which will become the primary factor during the next few months. That is, price incentives may be granted on a volume basis to buyers to continue to lift base oils to protect production levels. Unfortunately, demand is falling at a greater rate than anticipated some months ago, and very few positive signs are emerging to hasten any change in the short or medium term.

In the meantime, Seasons Greetings.

Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in East Grinstead, U.K. Contact him directly at pumacrown@email.com.