The December agreement by OPEC and other oil-producing nations to curb crude output clearly raised prices, but opinions differ about what will happen next. There seems to be two general theories, the first saying that production cutbacks will continue rising, though at a moderate pace, reaching around $70/bbl before the end of 2017.

Another school of thought says that as soon as producers such as Saudi Arabia signal that they are restricting the flow of crude to current customers, others – such as Iran – will fill the gap. Many predict that Saudi Arabia and Russia (if it actually does cut production) would not tolerate this poaching and would retaliate by re-introducing previous quotas. A return to the previous state of over-production could drive crude prices back down to levels between $30/bbl and $40/bbl.

While the debate goes on, base oil producers can only respond to the current situation. For most producers and sellers, that means trying to move prices higher to cover higher cost inputs.

Europe

Export offers for Group I grades throughout Europe have moved upwards over the past couple of weeks, but sellers are being guarded not to push prices too high for fear of discouraging demand. At some point these increases should affect finished lubricant prices. Base oil sellers are also wary of the possibility that crude values could retreat.

Prices did not fall in the past week, with light solvent neutrals remaining between $535/t and $560/t and solvent neutral 500 and SN600 at $590/t-$610/t. Bright stock is becoming an enigma, with some suppliers of this grade intent on raising prices as much as possible while others appear content to keep prices competitive in order to move large parcels. The net effect was that the price range for bright stock widened to $785/t-$845/t.

The values above apply to large parcels of Group I supplied or offered FOB ex-mainland European supply points

Intra-European base oil prices rose for January sales following earlier increases for export transactions. The amount of increases generally turned out as expected – around 15/t-25/t (or the equivalent in other currencies) although some sellers did not issue numbers this month, saying they wanted flexibility to adjust prices in either direction if conditions change. The differential between export and local prices shrank to 20/t-55/t.

Some buyers are being tempted to delay large purchases based on the belief that the market may reverse course on prices.

Group II suppliers importing to Europe have almost universally increased prices for all products in source markets, and local sellers throughout Europe said their prices are rising and that more markups are possible this month. The amount of increases so far appears to have been tempered. Buyers reported hikes of 20/t-25/t for all Group II grades, but some downward adjustment may occur. These increases are far short of those announced in source markets.

Current prices for fully approved grades are re-assessed from last week $575/t-$600/t for light grades and $710/t-$775/t for SN500/600, CIF main ports Europe. Ex-tank prices are $45/t-$60/t higher.

No changes were reported for Group III sales within Europe, though the market is still awash with rumors of markups. This report again has 4 centiStoke and 6 cSt grades with less than full approvals at $550/t-$670/t, FCA northwestern Europe. Prices for fully approved Group IIIs, FCA Antwerp-Rotterdam-Amsterdam, are also unchanged at 705/t-735/t for 4 cSt and 6 cSt and 670/t for 8 cSt. Greater confidence would require more information. CIF levels for large cargoes of Group III remain $25/t-$50/t lower than the equivalent dollar prices for FCA sales.

Baltic and Black Seas

Baltic trade remains relatively quiet, and with the Orthodox Christmas celebrations in Russia starting Jan. 7, it will be a few days before some form of normality resume. Prices therefore are rather indistinct, with announcements and offers coming out later this week.

FOB prices for oils are expected to rise in line with Group I levels posted in mainland Europe. However, as is often the case, pricing out of Russian refineries can often lead the market, and it may happen this time. Some sellers advised they may seek larger increases due to numbers coming from ex-gate supplies within Russia. Most distributors and resellers in the Baltic work on a cost-plus basis, adding a profit margin onto delivered rail prices.

The most recently reported prices for SN150, SN500 and SN900 were $495/t-$520/t, $525/t-$545/t and $595/t-$620/t, respectively.

Black Sea trade has started to build, with a number of cargoes being negotiated for imports into western Turkish ports. However, particularly bad weather has delayed imports from Black Sea and Mediterranean sources. Buyers said Mediterranean sellers have increased offers for late January and February discharge, and Turkish receivers are investigating alternative Group I sources.

Choices seem limited to exports from the Red Sea, the Middle East Gulf and Russia. Oils from the United States and Brazil has also been evaluated, but the lag time between fixing and discharge may prove untenable.

Prices are varied depending on source and cargo size etc, but Mediterranean suppliers reportedly offered $545/t-$560/t for SN150 and $620/t-$645/t for SN500/600. Bright stock from Spanish and Italian suppliers is offered at $918/t, CIF Turkish ports.

Middle East Gulf

According to shipping reports, Red Sea activity is mainly confined to Group I parcels loaded out of Yanbual Bahr and Jeddah, Saudi Arabia, for points east, including Oman, the United Arab Emirates and Indias West Coast. No further news has been gleaned regarding the enquiry which was circulated for Group I base oils to be delivered into Aqaba, Syria.

Reports from Middle East traders and distributors refer to activity of Iranian exports from Bandar-e Emam Khomeyni and Bandar Bushehr. The principal exporter of Iranian Group I base oils, Sepahan Oil Co., has been stepping up volumes delivered into southern Iranian ports for export. Most cargoes are being shipped by sellers dealing directly with receivers at discharge ports. This represents a change since most sales conducted before international sanctions were handled by traders who acted as shippers who eventually sold to buyers in India and beyond. Shipment sizes have also increased.

Prices for higher spec SN500 remain at $630/t-$645/t, although netting back prices on the basis of delivered values less freight and other ancillary costs suggests that these prices may actually be discounted to as low as $610/t, FOB. Iranian SN500 imported to and re-exported from the U.A.E. remains offered at $625, FCA, or $635 FOB, but for lower oil with lower viscosity index.

Oils from the U.S. and Brazil are still being touted in Middle East Gulf markets, but traders and other buyers looking for blend stocks are in no rush to accept current offers. Some offers from the U.S. East Coast have been withdrawn and then offered and accepted into West Africa. Traders say Group I shipments from the Western Hemisphere may still have a market in areas such as U.A.E., but new availabilities will have to be declared. This may not hapen until February or March. Prime Group I material will delivered to contract buyers in U.A.E. at $595/t-$620/t for SN150, $645/t-$660/t for SN500 and $865/t-$900/t for bright stock.

Group III grades from Al Ruwais continue to steal the limelight for exports out of the Middle East Gulf. Again without source confirmation of FOB prices, one can only go by arithmetic, which suggests costs at loading are below $500/t for 4 cSt and 6 cSt oils.

Reports from blenders in Kuwait and Bahrain suggest small volumes of Group II grades are being purchased from hub storage in U.A.E. and used in those areas to make motor oils. Prices for shipments from the U.S. appear to be rising by some $20/t-$30/t, on a delivered basis. Far East offers are also up, but only $10/t-$15/t above offers received before Christmas. Prices are now assessed at $545/t-$560/t for light grades and $695/t-$725/t for 500 neutral and 600N, CIF Middle East Gulf.

Africa

North African deliveries of Group I grades are prominent in Mediterranean traffic this week, with cargoes moving to Morocco, Tunisia, Algeria and Egypt. Sources in Italy and Spain are covering most of these requirements, although two Greek parcels have been identified for delivery this month and another for February discharge. Intra-company trade also makes up a number of the parcels moving around the Mediterranean, including bright stock going into Greece and other Group I neutrals into the Adriatic and secondary Spanish hubs.

West Africa appears to be recovering after the holiday period, with a number of cargoes either loading in Europe for delivery to ports such as Dakar, Conakry, Abidjan, Tema, and Cotinou.

These other locations are normally side-lined when it comes to base oil imports into West Africa since Nigeria is the primary destination. Nigerian receivers disclosed that they look to take a number of cargoes from the U.S. Gulf and East coasts during the next couple months, since European Group I prices are deemed too high.

Such talk has been heard before, and buyers almost always return to Baltic suppliers, where negotiations can yield competitive base oil prices at the end of the day. Deliveries in flexitanks to Nigeria and other West Africa locations are almost exclusive business for Baltic sellers since other sources shun these smaller shipments.

Receivers in Lagos described very competitive offers from U.S. sources for Group I grades that can be blended to order. Bright stock is also available at very attractive levels, though Nigerias banking problems continue. Current offers reflect SN150 delivered at $620/t, SN500 at around $685/t-$699/t and bright stock at $870/t-$885/t. The bright stock prices from U.S. supply points are considerably lower than ex-European sources, at least at this time.

European based offers are around $25/t-$55/t higher, but Nigerian sources contended it is only a question of time before European suppliers come into line. One trader suggested the opposite, that prices for U.S. sourced Group I will rise.

Baltic and mainstream European prices for February loading are estimated at $655/t for SN150, $685/t for SN500 and $755/t for SN900, CFR/CIF Apapa port, Lagos, Nigeria. Indications for bright stock vary depending on source, but on best available ex-European mainland, they are estimated at more than $900/t, CFR/CIF.

Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in London, U.K. Contact him directly atpumacrown@email.com.