Base oil demand still shows no sign of returning to pre-pandemic levels, but prices have started to recover, particularly in the API Group I camp where prices possibly had no further to fall.
Cutbacks to production effected over the past few months by refiners of Group I grades have started to bite, and with demand rising for these base stocks, pressure is being exerted on the supply chain to meet inquiries from traders and blenders across the region.
The other factor affecting demand for Group I base oils is the large price differential between Group I and Group II prices which is acting as a deterrent against buyers moving over to Group Il. This difference in pricing is narrowing as Group I levels start to rise, but there remains a massive incentive to continue using Group I grades wherever possible.
Crude oil prices are stable to firm with levels remaining around the same mark as from two weeks back. Dated deliveries of Brent crude was at $42.85 per barrel, now for September front month. This level is marginally higher than last reported, but demand is still not strong enough as to lift crude prices to the next level, and some commentators argue that they may hover around current levels for some time to come. West Texas Intermediate also firmed slightly at $40.15/bbl, still for August front month. The crack is narrower than traditionally seen, even against the backdrop of U.S. markets being depressed due to the continuing coronavirus situation.
ICE LS gas oil prices rose to $367 per metric ton, up around $20/t up from last report, perhaps reflecting the increasing use of cars, vans and trucks across the regions, as movement restrictions are lifted in many countries. These prices were obtained from London ICE trading late Monday.
The Group I export scene has changed radically over the past few weeks, from a market which was long with prices which were close to raw material costs, to a tight market with rising prices and shortages of material. Group I base oil export prices throughout Europe have risen substantially from the lows seen some weeks ago with many buyers expressing concerns regarding future supplies. Some have expressed frustration where regular suppliers have either run down stocks and have little material available, or where traders and distributors have not replenished material from refinery sources due to uncertainty caused by effects of the coronavirus pandemic.
Increases are significant for some grades such as bright stock which is in limited supply acoss Europe with factors such as current turnarounds and previous production cutbacks shorting the market to the extent that prices are continuing to rise. Where export prices were right down, levels have firmed, and the emphasis has changed to a lack of avails of all grades. There are some sources where only certain grades, such as light neutrals, are available and others where suppliers have ruled out having any availability during July and August.
With prices having risen between $30/t-$50/t across all grades, FOB prices in respect of SN150 are assessed between $375/t-$420/t, with SN500 also in demand and moving upwards to $390/t-$425/t. Bright stock in large quantities is tight and is placed higher between $425/t-$475/t, and with demand for brightsock increasing by the day, some players have forecast that this grade could move further by perhaps as much as another $25/t.
The arbitrage to export markets in West Africa, Middle East and of course Turkey where the Tupras refinery remains closed at least until the end of July, is open, but with limited availabilities around Europe enquiries are being declined at an alarming rate.
The above Group I export price levels refer to cargo sized (minimum 2,000 tons) parcels of Group I base oils, FOB ex mainland European supply points, always subject to availability.
Local or regional European Group I markets are approaching the summer recess period when traditionally business slows with many operations either closing for a time or at least moving to shorter hours and lower production rates. This year may be different with some major blenders maintaining full production, trying catch up after the restrictions during the peak of the coronavirus spread. Having lost time and output during that time many blenders are looking to improve sales and cash flow during the next few months, to bolster lost opportunities. Demand is on the rise for finished lubricants with manufacturing and process industries avoiding the summer break and continuing to operate through August
Prices have moved up and from July 1 increases were notified across the board, and with further increases marked for next month there is something of a scramble to buy stocks now rather than wait. There is a spike in demand being caused by potentially higher numbers being applied to Group I base oils from next month. Some suppliers have increased prices on a weekly basis rather than wait until month end Prices in this secotr of the market were relatively higher than export levels, hence the increases to prices have been less dramatic. Nevertheless these have been substantial with levels rising by some $20/t-$30/t. Suppliers are holding contracted customers to their allocated quantities with no extra availabilities to offer during July and August.
The effect of substantial price increases within the export market, and smaller increases in the domestic markets has narrowed the differential between the two groups of prices. The differential between domestic and export numbers is now assessed between €55/t-€120/t, regional prices being the higher.
Group II prices have firmed, although not in such a dramatic fashion as the Group I slate. These prices were substantially higher previously but are have responding to healthy demand following the coronavirus episode. levels for Group II base oils have moved upwards by $10/t-$20/t, and may move further given the current impetus. The increases are purely down to demand which is positive due to the lack of Group I avails and also the move to higher specification finished lubes which are becoming more and more prevalent throughout European markets.
The announcement from the EU Tariff Group that the EU import tariff limits for the second half of 2020 will remain at the same level as for the first six months of this year. With the Covid-19 situation muddying the waters for imports, it was felt that the quota should remain as previously set, until normal trading affords the scope to alter the limit. The limit will be 400,000 tons over the next six months, until December 31st.
Group II prices are moved higher, to between $665/t-$700/t ( €590/t-€625 ) in respect of the two lighter vis grades (150N and 220N), with higher vis grades (500N and 600N) between $695/t-$750/t ( €630/t-€665 ).
Prices still pertain to a wide range of Group II base oils, including European, and U.S. fully approved grades, but also unapproved or partly-approved grades from Middle East, Far East and the U.S.
Because of the Covid-19 situation certain source suppliers of Group III base oils were hesitant to replace or increase stocks in tank. This in itself has caused a tightening in the market with restrictions on availability for sole players. This in turn has allowed distributors to push prices higher with targets of anything between $20- $50/t being applied to existing levels. With demand rising, replenishment cargoes are on the way into Europe from Far East and Middle East supply points.
Prices are taken higher with levels between €670/t-€695/t in respect of the range of partly-approved Group III base oils. Numbers are ranging between €685/t-€695/t in respect of 6 cSt and 8 cSt base oils, with 4 centiStoke grades between €670/t-€685/t. Prices refer to FCA supplies ex northwestern European hubs.
Prices in respect of European OEM fully approved Group III base oils are also moved higher with levels between €690/t-€725/t in respect of 4 centiStoke base oils, with 6 cSt and 8 cSt grades between €695/t-€755/t. The wide variations and the low ends of the ranges are where some fully approved material has discounted prices, competing sometimes with partly-approved material.
Also the opportunity for fully approved oils to increase prices is limited compared to the partly-approved products which have greater scope to move upwards in price.
Baltic and Black Sea
Due to the tight Group I supply scene in Europe, buying interest in the Baltic picked up, but inventories are not at high levels. That’s because many Baltic traders and distributors did not purchase from Russian refineries during the latter part of June due to offering low numbers in bids, which were scorned by sellers.
Export interest is high due to the lack of European and U.S. availabilities to service markets such as Nigeria. Inventories are starting to come back to pre-COVID-19 levels, and later this month a large cargo of some 15,000 tons will possibly be arranged for West Africa. All three of the main Russian producers offered barrels for July, which were taken up by buyers in the Baltic.
Due to having to agree Russian refinery price levels, numbers in the Baltic are expected to rise this month, and a couple of cargoes moved from Baltic sources into Antwerp-Rotterdam-Amsterdam. These supplies will be welcome additional barrels for northwestern European blenders, who may face tight supplies of API Group I base oils.
Prices are placed slightly higher with FOB numbers for the two main grades, SN150 and SN500, assessed some $5-$10 per metric ton higher. Levels are extended to $315/t-$360/t. SN150, SN500 and bright stock from Gdansk are also indicated higher, more in line in line with mainland European levels at around $385/t-$420/t for solvent neutrals, and bright stock at $435/t-$465/t FOB.
Black Sea trade is changing, with Turkish buyers almost desperate to lay hands on Group I supplies. The tighter supply scenario in the Mediterranean steered some Turkish buyers to re-examine Russian export barrels, which may be the only alternative. With the refinery at Izmir closed until at least the end of this month, and supplies of base oil only becoming available towards the middle of August at best, supply options are quickly running out. Mediterranean refiners exhausted all available material for July, with some also stating that they do not have any surplus material available during August.
An offer of material from Turkmenbashi refinery, dismissed by Turkish buyers as too expensive, may resurface if supply options become tight. The bid prices from Turkish buyers for the previous tender were some $200/t lower than the Turkmenistan price ideas. This was on the basis of FOB Turkmeni port. Prices were heard at $390/t for SN180, while the SN350 and SN450 were priced at $417/t. Turkish bids were around $205/t.
Kavkaz, Russia, supplies are targeted into Israeli receivers, with a small cargo of some 2,200 tons loaded last week. STS levels are at $310/t-$325/t for SN500, with quantities of SN150 at $300/t-$315/t.
Turkish buyers secured a number of cargoes from Mediterranean sources for this month, although these were finalized during June. No new parcels were identified for Late July and August. These cargoes out of Livorno and Aghio are confirmed into Gebze, Turkey and Derince.
Price indications firmed for the latest cargoes, assessed at around $445/t for SN150, with SN500 at $455/t basis CIF Marmaris in cargo lots at 2,500 tons to 5,000 tons. SN100 is priced at $450/t CIF.
Group II and Group III base oils on the basis of ex-tank from Gebze, Turkey, have prices revised upwards to $685/t-$750/t for low and high vis Group II grades, with partly-approved Group III base oils again adjusted to $625/t-$655/t.
Following a number of large cargoes from a Red Sea source, refinery stocks are more in line with seasonal requirements. The producer is trying to move prices higher for barrels of both Group I and Group II base oils out of Yanbu’al Bahr in the case of Group I and Group II, with Group I solvent neutrals loaded from Jeddah. No further details came to light regarding the parcel of bright stock that was mooted to load from Yanbu for receivers in the U.S. Gulf.
The third quarter tender for bright stock to Egyptian General Petroleum Corp. in Alexandria has been re-issued, although few European suppliers either have the interest, or indeed, the product to cover the 15,000 tons requirement. That’s in addition to commitments to supply this grade elsewhere. Since the tender only includes bright stock, this limits the logistical advantages of supplying just one Group I grade.
The present incumbent supplier may retain this tender, with supplies coming out of Yanbu as in the past, although confirmation has not yet been heard on this subject.
In the Middle East Gulf buyers face similar supply problems to those in Europe, since offers for Group I cargoes from Europe and the U.S. were turned down some weeks back, with receivers seeking lower prices. These cargoes were sold elsewhere and hence are no longer available. With the FOB situation tightening and availabilities shortening in both the U.S. and European markets, receivers in the United Arab Emirates are beginning to scour the market for alternative supply options.
Iranian availabilities dried up after some 18,000 tons of Iranian base oils were delivered into the U.A.E. during June, and any potential availabilities are now at much higher prices than buyers in the U.A.E. would want to pay. A cargo enquiry for Pakistan for 5,000 tons of SN500 has drawn a blank on supply, the same problem which may soon be faced by U.A.E. buyers. Some comment that they may have to fall back on supplies of Russian export barrels from Kavkaz, Russia, in the Black Sea. This is not an option at the moment, with sellers looking to supply Israeli and Greek receivers at higher prices. Others said that they will rely on supplies arriving from Red Sea sources, although most supplies coming from this supplier are contracted barrels, with few opportunities for spot sales into this region.
This is a conundrum facing the local U.A.E. market, which does not appear to have a solution. With no possibilities from the U.S., Europe or the Far East, the supply situation for Group I material is becoming critical, since these are the workhorse base oil grades for this region. Bright stock is particularly tight, with few options for replenishment stocks.
Local sources indicated numbers for Iranian SN500 at $420/t-$445/t CFR U.A.E., with SN150 at $410/t-$425/t. There are few availabilities for these grades at this time.
Group III exports from the Middle East Gulf are fewer than previous months, due to less material being available. A number of cargoes are loading out of Al Ruwais for replenishment stocks going into the U.S. and Europe. FOB prices for any new business from Sitra or Al Ruwais are seeing prices hiked higher in response to demand picking up in almost all markets. Huge problems persist with the Indian markets and coronavirus, with that country experiencing a new surge of cases as a result of early lifting of restrictions.
Netbacks for exported Group III base oils are pitched higher, with levels at $610/t-$660/t for the partly-approved range of 4 centiStoke, 6 cSt and 8 cSt Group III base oils. Group III base oils from Sitra are also assessed higher this week due to holding the full range of European approvals. These base oils are assessed at $685/t-$735/t FOB for the 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 freight costs.
Reports suggest extremely low prices for Group II base oils supply out of U.A.E. hub storage. These prices may be based on local supplies from a Middle East Gulf Group II supplier, because prices for material from Far Eastern and U.S. sources will be pitched much higher, more in line with numbers heard previously.
The low levels heard from local sources are placed at around $480/t for N150, with N500 placed at around $540/t.
Other prices remain unchanged, with indications on an FCA basis at $625/t-$700/t for light vis grades 100N, 150N and 220N, with 500N and 600N at $640/t-$725/t. These prices are geared to quantities and contract terms and conditions.
Partly approved Group III base oils ex-tank U.A.E., delivered from Al Ruwais and Sitra, are heard at $590/t-$650/t for 4 cSt, 6 cSt and 8 cSt grades.
Mediterranean trade diminished due to lack of availabilities from Mediterranean refiners. With a couple of Mediterranean installations going into turnaround, this will tighten up the market to a greater extent. Contract trades into North Africa will be sustained, but spot trades will be few and far between. The coronavirus spread is curtailing blending operations in Morocco, Tunisia and Egypt.
West Africa had a quiet spell, with only one new cargo identified for loading. This parcel of 14,000 tons of Group I base oils loaded during the last days of June from Rotterdam and will arrive into Nigeria in about 10 days from now. The reported fixture of some 16,000 tons of base oils loaded in Korea and sold into Nigeria was inaccurate, as this cargo consisted of another petroleum product not related to base oils.
A further cargo for Apapa is under consideration to load out of the Baltic later this month. The Group I grades to be loaded could be delivered into shore tanks by rail, in lots of 3,000 tons per train. Prices will be higher for cargoes arriving in the future, with the Group I picture in mainland Europe and Baltic showing a short market with tight availabilities.
Prices for Group I base oils imported into Nigeria are now rising, with FOB levels moving upwards for Group I grades. The last report noted it was possible prices would remain unchanged. However, based on the Rotterdam cargo, it would appear that prices have lifted, with cargoes showing numbers that may be $30/t-$40/t higher. CFR/CIF levels are assessed bat $495/t-$510/t for SN150 and SN500 at $500/t-$525/t, and bright stock, where applicable, at$545/t-$575/t. SN900 is indicated at $525/t-$540/t.
Prices are for cargoes of at least 10,000 tons delivered into Apapa port, Lagos, Nigeria.
Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in London, U.K. Contact him directly at firstname.lastname@example.org.