The EMEA base oil market has reawakened, and buyers are bewildered by the lack of availability of API Group I base oils from many European and North African producers.
This revelation has taken a number of buyers by surprise, as if they were expecting that the market would return to some form of normality after the summer recess, and instead are finding that any possibility to purchase spot or new contract business has been totally spiked.
Producers say they did not expect to have a plethora of availabilities after the summer, and buyers were perhaps being hopeful rather than clever about how the market was going to turn out. One producer asked why buyers expected to see anything different from the period prior to the recess, given the turnarounds and maintenance work throughout the last two months within many refineries and base oil plants, which has affected the overall production of base oils in Europe.
A few suppliers stated that they do not have any possibility to sell at least until November, and that if supply remains at current levels, they may not have any unsold material until the first quarter of 2011.
Prices have started to rise again, reflecting the supply/demand picture. If any buyer who has title or claim to material at the moment is not willing to pay the asking price and wants to start negotiations, they are politely turned away, and the next buyer in the queue steps forward to take the material.
Prices this week for Group I neutrals are now in the range of $980 to $1,000 per metric ton for light neutrals such as SN 100 and SN 150, with SN 500 along with quantities of SN 600 from the Mediterranean and Northwest Europe chasing levels as high as $1,010 to $1,050/t. All are basis FOB mainland European production centres.
Bright stock in any sizeable quantity is in extremely short supply, since with allocations of large cargoes going to West Africa and Egypt, the market appears to be completely dry. Prices are less than tangible, and the guide to bright stock prices for the future will only be confirmed when the results of these large tenders are published.
One report of a cargo negotiation including bright stock from the United States has suggested that prices on a landed basis CFR into West Africa would be in the region of $1,380/t. After applying freight economics and margins, the netback resultant FOB level can be established at something approaching $1,290 to $1,320/t.
These prices have not suddenly appeared on the market, since cargoes loading currently would have been negotiated some three to four weeks ago. With many sales being indexed against published price levels, vast premiums are now in play over these quoted numbers, which in themselves bear little resemblance to actual market price levels.
Blenders in Western Europe are looking at alternative sources for their base oils and are finding that Group II/II+ material can sometimes be bought at lower levels than some of the Group I grades. This anomaly has occurred in the past when supplies of Group II base oils were long, and some importers sold large cargoes of light Group II material into the European market to compete with Group I prices. It would also appear that Group II prices do not react as quickly to increases as Group I, since there is a longer supply chain which somewhat harnesses the sales economics, taking a longer period of time for the effects to filter through.
Prices for Group II grades are certainly following those for Group I now, at $1,035 to $1,160/t for the full range of viscosities. It is anticipated that these numbers will rise over the next few weeks, maintaining the differential against Group I material.
Group III base oils, as noted last week, continue on a progressive pricing curve, meaning that prices are rising again in response to both availability and Group I pricing movements. It is anticipated that prices will this week reach around $1,140/t for 4 cSt and $1,160/t for 6 cSt grades, for truck delivered quantities within the European mainland.
The pricing spike has affected other players in the supply of base oils in the EMEA area, and Russian/Belarus supplies are being talkedat higher numbers than previously quoted. Where these prices eventually fall is not clear since negotiations have not been finalised for much of the material coming through the Baltic ports for export. At this time players expect another $30 to $40/t to be added to last weeks numbers; well find out within the next two to three weeks, when supplies are confirmed and the cargoes are lifted. It is worth reiterating that there are no large quantities of Russian material which is unspoken for, and all material flowing through the rail system into shore storage in Riga and Liepaja is already tagged with buyers names.
Iranian suppliers have not announced any further cargoes this week, for supply or loading up to the end of September, perhaps as a result of the continuing and growing problems associated with transactions between Iranian companies and outside banks. These are political decisions, and are not based on commercial risk or enterprise.
Saudi Arabia has been quiet this week with no news filtering out from Luberef. Following the application of their recent price increases, the producer will no doubt take stock of what is happening in Europe, and may respond with further adjustments over the next few weeks.
From West Africa news has arrived that a couple of importers in Nigeria and Ghana were looking to the Far East for supplies of material. Although this would seem an improbable solution to current pricing and supply difficulties, supplies of base oil from Thailand have been recorded into this area in the past. It is not clear exactly what base stocks are sought, but some of the larger blenders could be looking for a new supply of Group II or Group III grades in addition to the mainstay Group I material.
One mixed grade cargo is confirmed from the Mediterranean for Nigeria for September arrival, and prices are estimated now to be $1,100 to $1,150/t for solvent neutral grades, and bright stock around $1,350 to $1,400/t, all basis CFR Apapa port. With few alternatives available to buyers of heavier base oils in this region, and with subsequently higher pricing, there could be a recurrence of financing problems which occurred when base oil prices were at their zenith. Since 2008 credit lines have been severely limited to all but the blue chip importers in this region, with the effect that high pricing could rule out a lot of competition, strengthening the hands of the remainder of wholesalers and blenders.
Feed stocks have proved to play only a small part in the latest base oil prices. Crude had moved up slightly at the end of last week, but has retracted yet again, and is trading in the narrow band of $77 to $77.40 for WTI and $78.80 to $79 for Dated Brent. The crude market is still in contango with futures showing positive signs over the next three months, but this situation is an echo of what took place some three months back, so a revision to forward prices may take place yet again.
Petroleum products markets are firm with strong signs expressed through ICE gas oil front month and beyond. Traders are explaining the crude anomaly by stating that crude is still long, and although supplies have been trimmed over the last week, the market still perceives that demand is slow, and may get slower.
This obviously does not apply to a base oil market which appears to have removed all cost drivers and has reverted to a pure example of a supply and demand scenario. The envy of the petroleum industry?
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.