Europe-MidEast-Africa Base Oil Price Report

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Following Institute of Petroleum Week and the ICIS World Base Oil Conference in London last week, players are looking to pick up the pieces this week and evaluate how many business opportunities could be forthcoming from the events.

The EMEA base oil market was in full view during the ICIS conference, with many attendees from this region lending an air of optimism to the base oil market at all levels and from all sides. The hopes that this market has seen its worst days were very much in evidence, and there appeared to be positive notes to all proceedings, much more so than one year ago.

There were mentions of growth in the lubricants markets which could see trade climb back to the heady days of 2006-2007 with growth of 2.5 percent per year in the European arena, with boom areas such as China and India purporting up to 10 percent advancement, year on year, starting from 2010.

From the producers side there were shouts of renewed investment in base oil plants, whilst talks of upgrading quality in the market were paramount to many of the presentations at the conference. From a buyers standpoint there was certainty that availability and the correct specifications were being provided, and the whole ethos of the meeting was upbeat.

Unfortunately, one of the most important elements of the business could not be broached in public or general session, this being base oil pricing. The effect of prices on the market, and indeed the effect of the market on prices, is fundamental to the whole aspect of growth and sustainability within this industry.

Prices in mainland Europe have not really moved during the past few weeks, other than in specific cases where there have been minor adjustments for quantity or quality. The assessment for API Group I solvent neutral grades is in the band of $735 to $775 per metric ton, basis FOB, narrowing the spread by a marginal trimming at each end of the spectrum. Bright stock remains firmly locked in its range of $885 to $950/t depending on size of parcel and other grade combination.

European mainland sales have been sluggish, and producers are openly promoting availabilities in some locations, which is giving the impression to the purchasing fraternity that there may be some leeway for pricing to be lowered. There are hopes however that with prices increasing in China and Far East, there could be an arbitrage for Group I material to flow in that direction.

Russian and Belarus material has once again been prominent over the last few days, with bulk availabilities being offered across the viscosity range. There has been a rather oddball offer in the market for some 3,000 tons of mixed grades packaged in drums, with another purported batch of some 9,000 tons of similar material being touted for March arrival in the Baltic region. The prices for these grades have been reported around $700/t for the first tranche, but counter bids from several potential buyers have been rumored to be as low as $500/t, due to quality, handling and logistical issues attached to these parcels. These grades vary from I-8 to SAE50 but with quality assurances not forthcoming, anticipation is that they will be sold locally in smaller quantities.

Other Russian grades have been offered in bulk at levels between $680 and $720/t basis FOB Baltic ports, which more accurately reflects the current market for these grades in that area.

In Iran, another peculiar transaction has been reported this week. Yet another cargo lot of 8,000 tons of light and heavy Group I solvent neutral grades has been sold FOB, ex BIK, at $705/t. This recurrence of an identical sale some months ago has aroused suspicions that these figures refer to the previous cargo, but up-to-date confirmation has been received that this is a new deal, but why the price is so low has not been revealed as yet.

Prices for other base oils in the Middle East Gulf, which are sold ex BIK and BA, have been stepped up to reflect other sales within the region and are put in the region of $745 to $775/t, for light and heavy neutrals respectively.

West Africa has seen a resurge of enquiries, perhaps due to the visits of many of the buyers from that region to U.K. last week, but perhaps also due to a rumor of significant increased demand from areas such as Ghana and Nigeria, with many of the smaller land-locked markets playing their part. How this has happened, and indeed, substantiating this story has not been possible as yet, and only an increase in the amount of material eventually delivered into this region will corroborate this suggestion.

West Africa prices for base oils have remained virtually as before, with Group I solvent neutrals in the range of $845 to $875/t, and with the usual relatively large sales of bright stock between $975 and $1,050/t, all basis CFR West African ports.

East Africa and South Africa have seen importers and local producers moving prices upwards by some $40 to $60/t for Group I products, but there have also been calls for discounts, or temporary allowances, to allow these increases to be applied over a period of some months, rather than with immediate effect. Prices, reflecting mainland Europe or Middle East Gulf FOB levels plus premiums for freight, are in the range of $820 to $865/t for neutrals, with bright stock around the $1,000/t level. Prices are basis ex tank.

Group II and Group III prices have again moved up slightly and may be set to move upwards again, particularly within the European mainland. These increases are merely aligning the imported price levels with source production costs which have necessarily moved up over the last couple of months. Prices for imported Group II material are deemed to lie between $860 and $1,060/t, while Group III prices still see a spread of more than $400, with a range between $875 and $1,285/t, delivered to buyers locations.

Examining the effects of fundamentals, crude appears to be performing the usual waltz, moving up to around $80 per barrel and then retracting to levels in the mid to high $70s. WTI is recording levels around $78.80/bbl with Dated Brent down around $76.40. ICE is trading at around $640 showing positives, with a growing crack due to the rise in ICE and the fall in crude levels.

Vacuum gas oil still maintains healthy demand both as an export to the United States with a solid arbitrage currently in place, and also in Europe where cold weather and power supply problems in France have driven gas oil demand for heating. Low sulphur VGO crack is around $4.60/bbl, maintaining the pressure for base oil producers to at least hold their ground, and in some cases even to try to increase numbers to improve realisation and refinery netbacks.

Unfortunately it is little early to state whether the positive aspirations heard throughout last week in London will be reflected in the base oil market, since even the most aggressive turnaround in fortunes will take time to filter through to a rather lacklustre market where there have been production cuts, lowering of inventories, diminishing demand, and a general reluctance to rush back into pre-recessionary modus operandi. With double-dip recession threatening to knock on the EMEA door, and the spectre of economic inflation hovering in the sidelines, this particular market would appear to be a long way from getting back to the heady days of three years ago.

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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