Fundamentals in European, Middle Eastern and African base oil markets are vastly different from those in Asia-Pacific and the United States, creating new arbitrage opportunities between the regions. Specifically, product availability is easing in Europe, the Middle East and Africa as supply increases and demand has diminished during the holiday season.
API Group I markets within EMEA regions had been resisting markdowns, but rumors are that in talking numbers for September delivery, prices succumbed to buyer pressure caused by the ever weakening export markets and arguments that the June and July run-up in values was not sustainable.
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Group II and Group III markets throughout the EMEA areas appear to be holding on to their recent highs, at least for the moment. Group III remains buoyant with healthy demand for all barrels that are available during September. Two major maintenance shutdowns are now completed, and large volumes of products have been noticed moving from the Spanish producer to European re-delivery hubs and also India. Almost 40,000 of Group III grades are moving during the second half of August.
Refinery run rates have still not returned to levels from before the pandemic as the coronavirus still rages in many principal markets and the demand for transportation fuels remains dampened. This situation does not allow for a full allocation of feedstocks for producing base stocks. Some refineries are forecast to start ramping up run rates during September, but there still remains a note of caution around the petroleum product markets.
Crude prices had dropped during the past two weeks but have now recovered in early trading this week to come back to almost the same values as two weeks ago. Demand is still patchy for major players in the Asia-Pacific region and the Americas, and forecasters predict that crude will struggle to remain at current levels in 2022.
Dated deliveries of Brent crude have climbed back to $68.50 per barrel for October front month settlement, marginally lower than two weeks ago. West Texas Intermediate performed similarly and now stands at $65.45/bbl, also for October front month.
With crude levels steady, ICE low-sulfur gas oil prices also returned to levels similar to those last reported, posting at $567 per metric ton, now for September settlement. These prices were obtained from London ICE trading late Monday.
Prices for European exports of Group I are lower across the board, with solvent neutrals losing much of the huge value they claimed earlier. Demand has fallen away during August, and increasing quantities of material have become available, exerting severe pressure on prices. Many sources have interpreted this as a natural readjustment to the meteoric rises seen earlier in the year. Whether values return to springtime levels is yet to be seen, but certainly the direction for export numbers is southwards.
Producers are not looking to build large inventories and are hence keen to seize every opportunity to move large parcels of Group I grades to export destinations. The problem has been that traders and receivers are not rushing to close purchases since prices are dropping and demand diminishing. Many are waiting until September before committing to large cargoes and are looking for lower prices for those purchases.
Prices for solvent neutral 150 dropped by between $100 and $150 per ton to $895/t-$950/t. Even SN500, which was in higher demand, has fallen to $1,395/t-$1,460/t. Bright stock is somewhat of an enigma with some sellers offering quantities at around recent highs of $2,200/t while others seem willing to lower prices to move large parcels. Thus there is a wide range this week, assessed at $1,750/t-$1,865/t.
Prices for Group I sales within Europe have remained almost in line with July highs, but sources say many buyers took little or no products during August since many lube blenders reduced operations to minimal levels for the month. Some facilities used the month for maintenance and repair work, so August has not been a representative period in terms of base oil offtake and sales.
The differential between export and intra-regional numbers is still considerable, assessed for September pricing at €75/t-€155/t, the latter being higher.
European Group II prices are relatively stable, with September prices being discounted only slightly from July and August levels. Demand even during August has remained buoyant and sellers expect a further boost during the remaining part of this year. The gap between Group I and Group II is probably at its widest for some time.
There are rumors that lower-priced Group II grades could be coming from sources in Asia-Pacific where supply is long, and producers in those regions may start to target more profitable markets around the globe. A number of Asian countries have free-trade agreements with the European Union that could encourage such trade.
However, there are still relatively fewer imports coming into Europe from the United States, where producers are building inventories as insurance against any potential disruption during the hurricane season. Major U.S. suppliers are still committed to the European market in spite of the draconian cutback to the quota on waivers of the import duty that applies to U.S. shipments. The quota for imports from countries without free trade agreements with the EU will be cut from 150,000 during the second half of 2021 to 75,000 for the first half of 2022 and then will be abolished. The European market could face shortages for Group II base oil should demand return to pandemic levels.
Group II prices remain relatively stable, with only nibbles of discounting taking place in a few rare deals. Levels are assessed at $1,500/t-$1,595/t (€1,260/t-€1,350/t) for 100 neutral, 150N and 220N and at $1,775/t-$1,845/t (€1,525/t-€1,570/t) for 600N. These prices apply to a wide range of Group IIs, including European and U.S. oils with full slates of finished product approvals and material from the Middle East, the Far East and the U.S. with partial slates or no approvals.
Group III prices are steady, holding their firm levels established throughout the summer as demand continues to rise. With literally no spot availabilities for September and October, customers are not hesitating to commit to quantities from the Far East or the Middle East Gulf that have yet to reach European distribution hubs. The Group III unit at Cartagena, Spain, has lost no time bridging large quantities of Group III grades into the distribution hub in Rotterdam.
Prices are slightly firmer for September and October at €1,580/t-€1,630/t for grades with partial approvals. That includes €1,595/t-€1,630/t for 6 and 8 centiStoke and €1,580/t-€1,615/t for 4 cSt, all on an FCA basis ex Amsterdam-Rotterdam-Antwerp hubs.
Group III oils holding full European OEM approvals such as Volkswagen will be priced higher, at €1,575/t-€1,635/t for 4 cSt and €1,625/t-€1,675/t for 6 and 8 cSt.
Baltic and Black Seas
Baltic prices continue their freefall, with further reductions to FOB levels taking prices lower. The discounting has not been as fierce as a couple of weeks back, but levels fell by up to $100 per metric ton from the last reported prices. Lower demand still is the order in Russian domestic markets, with the holiday month taking its toll on activities. This has meant that distributors and resellers in the Baltic have product to place into export markets.
There are a number of arbitrage openings for material to load out of Baltic ports, but August has been quiet, with only two cargoes plotted for the end of August. The first is for the east coast of the United Kingdom, with a parcel of 4,800 tons moving from Riga to Hull. The second is a relatively small cargo of 5,000 tons loading for receivers in Nigeria.
No further moves into the U.S. came from Kaliningrad, an arbitrage that remains open given the relatively firm prices for API Group I products in the U.S. The arbitrage difference between Baltic and U.S. Gulf at the moment is estimated in the order of $400/t. With freight for 5,000 tons cargo coming in around $85/t, healthy margins can be made.
FOB prices remain weak, with levels assessed with SN150 at $895/t-$925/t, SN500 at $1,095/t-$1,145/t, with SN900 at around $1,165/t.
In the Black Sea region traders are trying to take advantage of the arbitrage to the east coast of the U.S., with the promotion of a small parcel being aimed at receivers in Savannah. The numbers will work for this movement with a massive arbitrage advantage, although a suitable vessel may be difficult to locate and expensive to charter. Turkey is exceptionally quiet after the devastating fires which ravaged the south eastern part of the country. COVID-19 is also a recurring problem in some areas, and with many traditionally taking August for holidays, commercial activity is dull.
The refinery at Izmir has closed down production of base oils and is selling small quantities from existing inventory. No news is heard of for how long the stoppage will carry on, and in-tank inventory is also an unknown factor.
There are no reported Mediterranean sourced movements from Italy or Greece, going into the usual Turkish ports. Mediterranean indications from traders re prices for potential cargoes are moved lower, estimated at around $995/t CIF for SN150, with SN500 around $1,495/t.
Imported Group II and Group III base oil prices are maintained this time around, with no new imports mentioned for this report. Prices remain as advised for the Group II base oils, bat €1,465/t-€1,485/t for low vis Group II grades, with higher vis 600N at €1,825/t-€1,865/t. Group III ex-tank sales are at €1,640/t-€1,685/t for partly-approved and fully-approved 4 centiStoke material, with 6 cSt and 8 cSt grades at €1,675/t-€1,700/t.
Interesting reports from the Red Sea this week have a Group I cargo out of Yanbu and Jeddah loading later this week for receivers in Rio de Janeiro. This is a first for this trade and route, which may suggest that an arbitrage is open between the Red Sea and Brazil, perhaps due to a shortage of U.S. barrels that may have traditionally covered this requirement out of the U.S. Gulf. The cargo is comprised of two grades, totaling 5,000 tons. Two large cargoes also loaded earlier in August for the west coast of India and for the United Arab Emirates – a total of 32,500 tons of Group I and Group II base oils made up the two cargoes.
There are no reported Iranian movements of base oil coming out of any of the lower Middle East Gulf ports that are normally used for the storage and loading of base oil cargoes.
However, there are reports of Group I availability for export in U.A.E. with one grade available out of storage in Jebel Ali. This material has a relatively high specification not matching any Iranian material other than the SN500+. The certificate of origin will state “U.A.E.,” and some 2,000 tons of this SN500 is available FOB on a prompt basis. Indication price is around $1,495/t, and availabilities may be around 3,000-4,000 tons of this grade on a monthly basis from October going forward.
Cargoes of Group III grades loaded out of Al Ruwais for the west coast of India and China, whilst a parcel of Group lll+ will load out of Ras Laffan in Qatar next week for Indian receivers in Mumbai. The receivers are thought to be the Indian affiliate of Shell, since Shell do not sell these Group lll+ grades directly to third parties, supplying only to affiliates and other appointed blenders.
Netback assessments for Group III base oils exported from Al Ruwais and Sitra are pushed higher, following price rises in export markets such as China, the U.S. and Europe.
Netbacks for Group III base oils exported from Middle East Gulf are assessed at $1,645/t-$1,755/t for 4 centiStoke, 6 cSt and 8 cSt partly-approved Group III base oils. Group III base oils from Sitra refinery, holding full approvals, will netback at a higher level due to pricing differentials in the various export markets. These grades are assessed to netback at $1,685/t-$1,775/t for 4 cSt, 6 cSt and 8 cSt Group III base oils.
Notional FOB prices on a netback basis are based on prices derived and informally assessed from regional selling levels, less marketing, handling and estimated freight costs.
Group II base oils are imported into the U.A.E. from numerous sources in the U.S., Asia-Pacific, Saudi Arabia and Europe, in both bulk and flexies, which are resold on an FCA basis. They have prices maintained remaining at $1,575/t-$1,685/t for light vis grades 100N, 150N and 220N, with the heavier vis 500N and 600N grades at $1,875/t-$1,920.
South African sources have advised that the large cargo of base oils and other chemicals was fixed and loaded out of Rotterdam and Fawley last week, arriving in Durban during the second half of September. The vessel will load over 14,500 tons of multiple grades.
Shipping reports that 11,300 tons of Group I grades will deliver into three West Africa ports – the first in Guinea, followed by Cote d’Ivoire, and finally 5,000 tons of three grades that will cover the Ghana requirement for Tema. The quantities going into Conakry and Abidjan are not disclosed.
Nigeria is quiet in terms of cargoes arriving, with only one Baltic enquiry out on the market, which may load later this week or next. Nigerian buyers are still hesitating to purchase large cargoes at this time, seeing that over the period of the last few weeks, Group I prices from Europe tumbled.
There are reports from Lagos that local blenders ran out of some base oils and that operations in a number of facilities were suspended until replenishment supplies arrive into Apapa. The cargo from Livorno with 5,000 tons of three Group I grades will be the first to arrive during the fist half of September.
CFR and CIF levels for Group I base oils, currently programmed to land into Apapa during August are maintained this week until confirmation of further cargoes are advised and confirmed. The Baltic cargo may have lower number attached to it, but until the cargo is loaded, this information remains strictly private and confidential.
Prices remain in the ranges advised in the last report and are assessed at $1,765/t for small quantities of SN150. SN500 is reckoned to be around $1,825/t, and SN900 with minimum viscosity index of 95, is priced at around $1,885/t.
Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in London, U.K. Contact him directly at email@example.com.