Festive times appear to be upon us, but in the base oil market it appears that there is little to be festive about.
Producers are taking to embracing and entertaining their contract customers to ensure that they will continue to lift their regular barrels from the refineries in the New Year, whilst still hoping that year-end inventories might still be moved out of storage. Prices for API Group I solvent neutral base oils are still be touted at levels between sub-$500 per metric ton for lower-end material, and hypothetical premium prices at up to $750/ton, all basis FOB.
The only material moving has been small quantities of the lower-cost grades to opportunistic buyers and receivers. Mainline producers have been satisfied to retain stocks and talk price levels well above the real market, perhaps because these producers do not have the barrels to sell anyway. Or maybe they hope to push their first quarter contract prices at higher levels. Either way, the spot purchase market impasse remains.
We are seeing the disparity not just between bright stock and solvent neutral grades, but the emergence of a three-tier market, with those willing and able to supply material at the new lower levels, and those others wishing to hold out for the medium to long haul, and of course the producers with bright stock, who are still enjoying premium prices for a grade in demand, still at over $1,000/ton FOB Europe.
Realistically, this is the last week in which any new spot cargo lifting can be arranged prior to the end of December, due to lack of banking days and vessel dates, but any real shipping activity seems to be very low in Europe and Middle East. There has been little talk regarding prices on any specific basis during the last week, particularly in thePersian Gulf region and throughout this area, including India (with all latest problems) and Iran. It would almost seem that producers and receivers alike havedeclared an armistice on negotiations for new business until after the holiday period.
There are still a few optimistic parties around, mainly from the buying fraternity who have been throwing exceptionally low-bid numbers at some producers, whose hands are totally tied by the real costs of their production. If they were to acquiesce to buyers expectations, they would certainly be entering the forbidden territory of negative netback. Just for the sake of completing the pricing picture, some buyers have been heard asking to pay less than $400/ton FOB Black Sea and Baltic ports. At this point they have been politely turned down.
Overall production of Group I base stocks has certainly been reduced, and it is difficult to see how previous levels can return to normal in the short or medium term. The cutback in material availability will not have any effect to drive prices back up, since demand factors are now seen as approaching an all time low, due to economic cutbacks for all high users of finished lubricants within industry.
Group II and Group III production and supply appear to be less affected at this time by current economic factors, but the concern for the longer term is rising due to these grades being specifically targeted for future developments, particularly within the automotive sector. Worries are that the downturn has not yet started to bite into the prices for these grades, but this will inevitably happen, and when it does, the fall will be sharper and perhaps more severe than we have seen so far.
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.