Europe-MidEast-Africa Base Oil Price Report

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With underlying fundamentals in the spotlight, the EMEA base oil market is divided between sellers, who believe prices may still have some way to move upwards, and buyers, who signal that they are not prepared to accept any further increases.

Buyers are stating that when crude and products were at these levels last time around, base oil numbers were much lower. Base oil refiners are using the market by regularly imposing small price increases, where there may not be a financial or economic need to do so, buyers assert.

Producers respond that the market is short, and all foreseeable quantities of base oil are spoken for and are allocated up to six weeks forward. Potential buyers counter that European refiners have cut back to such an extent that an artificial demand factor has appeared, due mainly to the lack of refinery production.

Whilst these arguments may be proved correct, base oil prices are still rising, perhaps in smaller tranches than seen previously, but moving upwards all the same.

With crude levels showing further retrenchment to new lows of $64 per barrel for WTI and $68.60 for Dated Brent, these marker crude oils have shown drops of $6 and $5 per bbl respectively. European crude levels appear to be slightly firmer than elsewhere, but have shown the same relative weaknesses in the last 48 hours of trading. European economic problems are one aspect leading these levels downwards. The confluence of notional support at around $65 to $66 has been broken, and crude values are now headed into unknown territory.

Feedstock prices have closely followed crude values, showing an overall 20 percent fall in price over the last month. Quotations for low sulphur vacuum gas oil are showing weakness below $500 per metric ton, providing new lows for 2010 for this product group. These are significant movements in any market.

Prices for API Group I solvent neutrals from mainstream European producers are now in the ranges of $870 to $890/t for light neutrals, and between $895 and $920/t for the heavier grades such as SN 500 and SN 600. Bright stock in mainland Europe is standing at similar levels to last week – $1,020 to $1,050/t – only because there have been no reported offers or new sales of this product during that time. All these prices are based on FOB levels.

Group II and Group III players in the market are still trying their level best to move prices upwards. These sellers are playing against a double edged sword: the exchange rate between euro and dollar is going against importers, and rising production costs at source are heaping pressure to sell at higher numbers to achieve acceptable returns and netbacks. There are also turnarounds in the Far East, and a more attractive market in the United States, with fewer exchange rate problems, particularly for Group III base oils.

Prices for Group II grades are now between $975 and $1,100/t for the full range of viscosities delivered in mainland Europe. Group III numbers are starting to creep upwards towards the 900 to 930/t range, particularly for 6 cSt material. These numbers will provide U.S. dollar equivalents of $1,100 to $1,150/t, and relate only to deliveries within the accessible European centres. Higher delivery charges will increase these prices up to as much as $1,300/t in other areas.

In the Baltic there are scant availabilities of Russian barrels, with some lesser quality I-20 and I-12 showing at levels close to $855/t, basis FOB. One parcel of around 1,800 tons of SAE 10 and SAE 30 is being priced within the mainstream European price band, amid reports that an asking price of some $920/t was touted by the selling traders. There have been rumours of some small cargoes of Black Sea Russian light solvent neutrals coming out of Azov, but there are no verified shipping fixtures to indicate that these parcels have been sold within the Black Sea confines. Turkey would be the most likely destination for this type of material.

In the Middle East Gulf region, Iran continues to defy Western banking limitations, and exports are reported this week for cargoes coming out from Bander Imam Khomeini and also from Bander Bushire. The latter port has loaded 5,000 tons of lower quality SN 500 exported from Iran, with prices mentioned at $850/t basis FOB, whilst the higher specified SN 500 and SN 600 has been sold at $890/t ex BIK. The differential between the types of material from two different production centres pertains mainly to colour, viscosity index and flash point.

There have are some rumours of Iranian base oils coming through UAE, which are being priced at around $920/t basis FOB Jebel Ali, but these details have not been corroborated by sellers nor by potential buyers as yet.

South African buyers have announced the arrival of a small mixed grade cargo of some 1,000 tons from Saudi Arabian sellers, which is apparently being split between a local major and a trader. This unlikely occurrence appears to be in response to some shortfalls in production levels within South Africa, but may also represent an experimental import, testing the likelihood of taking larger parcels into the region, perhaps for cross border sales into Botswana, Mozambique and Zimbabwe.

South Africas CFR/CIF or ex tank prices are likely to compete with locally produced material, hence in the range of $1,050 to $1,100/t for the solvent neutrals, and if bright stock forms part of the cargo, this grade will appear in the range of $1,200 to $1,300/t. The exchange rate between the local rand and the U.S. dollar, may weaken the chances for large scale importing, but at the same time may also produce a local price hike effect for base oils which could offset any resultant differential.

West Africa has been quieter this week after the arrival of around five large cargoes into Nigeria, Ghana, Senegal and Cote dIvoire. There are small pockets of enquiries for base oils to be delivered in flexi-bags, perhaps destined for remote locations, for example in Mali, Niger and Chad. Traditionally base oils were shipped either by truck or in drums, both methods being prone to contamination and theft. Using flexi-bags for delivery provides these destinations with unadulterated base oils which can be utilised in the blending of finished lubricants under licence.

Prices into West Africa have not moved from last reported numbers, but for these smaller lots will have an additional transportation premium of around $150 to $200/t. Prices for bulk imports are still $960 to $1,000/t for solvent neutrals, depending on source and quality. For bright stock, which can only be sourced from mainstream producers, the price will be $1,080 to $1,100/t. All prices are basis CFR West African ports, such as Apapa and Port Harcourt in Nigeria, and Accra in Ghana.

One major factor which could greatly affect European availability in the near future is the arbitrage between Europe and the Far East. It appears to have gone into a state of limbo, with Far Eastern buyers refusing to pay higher prices for additional cargoes of Group I base oils. Looking further ahead into July and August, there may be a case for surplus European and Middle East Gulf barrels once more becoming more freely available in the local regional marketplace.

Many buyers say they are waiting for the prices to come down before purchasing or booking further quantities of base stocks. How long will they have to hold off, or will prices retract at all?

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.

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