Over the last week in Europe, and similarly in many other parts of the world, it seems as if industry tariff prices have been established by the producers and suppliers of base oil by applying increases of $50 to $80 per metric ton across the board.
However, the hike in base oil prices is purely reflecting the costs of production and has absolutely nothing to do with demand factors. Demand has fallen again and shows no signs of strengthening in the short or medium term.
Unlike other petroleum product prices, which are totally and absolutely driven by supply and demand, base oil prices have taken on a new status, factored on the costs attached to manufacturing, storing and selling the material and its constituent parts.
Prices for marker grades such as API Group I SN 150 and SN 500 moved into the range of $420 to $530/t, basis FOB European main ports, and have not budged from these levels this week.
Neither has there been any new base oil sales activity, so we are now facing a situation where sellers have increased their prices, but buyers are now not buying at all. The flurry of attempted pre-increase activity has subsided, and buyers are back offering derisory bids for Group I material at the old levels below $400/t, creating a complete impasse in the market.
The increased price level for bright stock at $665/t basis FOB Northwest Europe was not substantiated, hence the notional price range for this grade is put at $600 to $635/t FOB. This price range is seen to be reasonable since it yields what is considered to be an acceptable netback to refiners, and brings bright stock back into differential harmony with the solvent neutral grades, per the longstanding price relationship before the enormous price hikes of 2007 and 2008.
Buyers are sitting tight playing the waiting game hoping that one or more of the producers will reach a point where they have to move inventory, but with a few turnarounds still in place in the European scene, sellers appear resolute in abiding by the increase in prices. Simply, producers of base oils cannot afford to sell material at previous levels; basic economics will not allow this to take place.
Producers will continue to strive to move prices upwards, since with the increases applied, it is estimated that refiners are still lagging behind, with feedstock and production costs still mounting. It would not be unreasonable to expect another $50 to $70/t price increase in the next few weeks.
Group II suppliers have been heard trying to move their contracted prices upwards, looking to reach levels of around $800 to $850/t, but resistance is fierce. These attempted price increases are not coming from source producers who are mainly located in the United States and Far East, where prices were dropping again last week, but from European importers who have seen the increase in Group I prices as two-fold opportunity. One opportunity is to promote Group II and Group II+ grades as economically viable Group I substitutes to gain market share, and the other is to increase the local prices enough to maintain the gap between Group I and Group II and II+.
Group III imports seem to be largely unaffected, maintaining their price tags at $1,100-plus per ton, basis delivered to European receivers and blenders by tank truck, barge and ex rack.
West Africa and South Africa have been quiet, with most markets fully covered for the time being. North Africa has seen base oils available again from Algeria, Egypt and Morocco, but at prices some $45 to $75/t over mainland European levels, which appear to be designed to keep potential buyers away.
Iranian prices in the Middle East Gulf region have moved up by $30 to $40/t, bringing these prices into line with European Group I FOB numbers. Whilst the Iranian producers want to move their prices higher, they are somewhat restricted by competition from Far Eastern and other Middle Eastern producers. Some of these latter have been particularly aggressive with Group II base oils below $600/t, competing on price with local Group I grades and of course showing higher quality.
Will base oil prices come back down to the sub-feedstock levels witnessed over the past two months? The short and logical answer to this question should be no.
Feedstock grades are still relatively high in value, with crude prices remaining just below $47 per barrel for Dated Brent and $50 per barrel for West Texas Intermediate, and with low sulphur vacuum gas oil and European gas oil prices just marginally below the highs of last week, at $352/t and $447/t respectively. It does not take a genius to work out that selling base oils below these levels can be financial suicide.
But as an indication of how fickle this base oil market can be, one or more producers, when faced with inventories at tank-top levels, could create a justification for clearing space and drop prices to sell, creating a breach in the dam which might turn into a torrent.
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.