Europe-MidEast-Africa Base Oil Price Report

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If last week was sitting on the fence, then this week in Europe has seen the stand-off between base oil producers and receivers grow to a new level. Frustration is building on both sides, but more so for the producers, since they are facing a situation where there is little, or even zero, activity to reduce their outstanding inventories for December, and while they may be willing to move on prices to accommodate these sales, they still cannot find buyers prepared to commit to taking these stocks out of tank.

An interesting observation was made by one trader. The last time crude and feedstock values were at current levels, the prices of API Group I solvent neutrals were around $450 per metric ton, and bright stock was around $600/ton. This historical fact is being eagerly aired by receivers and blenders who are not in any rush to buy, for two main reasons. Obviously the first is that they see the market falling further (although none of them can say when and by how much), and the other is that the overall demand for finished lubricants is beginning to fall, and therefore the lead time required to replenish base oil stocks is being stretched.

Strictly from a pricing point of view, it is difficult to see how this stand-off scenario will positively change in the short term, with producers and traders offering SN 150 and other intermediate grades through to SN 500 at FOB levels ranging from $680/ton (for lesser quality material) to $840/ton for mainline production. Bright stock remains the enigma, with prices still being negotiated around $1,250/t for substantial cargo lots.

The disparity on prices between solvent neutral grades and bright stock is certainly unusual, and is caused solely by supply and demand, with very few larger sized parcels of bright stock around. To add to this already healthy demand, there is the regular bright stock tender from Cairo-based Egyptian General Petroleum Corp. in the offing, which will require several parcels to be delivered over the next quarter, helping to shorten the market even further.

Prices for Group II material have not been affected by the accelerated fall of crude to the same extent as Group I grades, but with U.S. prices being realigned downwards this week, we may see some adjustments to the current levels in Europe. However, there is always the impression that the pricing of imported Group II base oils can be more adaptable, and can be tailored where necessary to accommodate that smaller market. In Europe, buyers of Group II base oils tend to be committed to their suppliers due to approvals for finished lubes, and this will stabilize producer prices to a greater extent than the more fluid Group I market.

Russian material is still available in considerable quantities from the Baltic, and some large shipping inquiries have been seen for combination cargoes from that area, destined for West Africa. Whether these inquiries reach completion may eventually be down to the FOB levels to which Baltic sellers are willing to go, and also the possibility of lower freight costs with economies of scale playing their part. These grades could be theoretically be landed into West Africa below the European FOB levels for prime Group I production.

Nothing appears to be moving in the Middle East other than contract volumes, and buyers are putting bids to sellers which are being politely declined at this point in time. However, starting next week, this could change, and we could see the sellers relenting to move their normal monthly, as well as year end stocks.

The shipping market for base oil cargoes is quiet, with a number of owners having open positions for vessels. This is extremely unusual for this normally busy time of year, but even with lower bunker costs bringing freight rates down to a relatively low level, the demand for vessels is declining. This leaves owners very little to do other than to count their money yet again, after the last few years of freights being at record levels.

Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products based in East Grinstead, U.K. He can be reached directly at pumacrown@email.com.

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