Demand is not a factor that can be rationalised by using feedstock values as a reason for lower selling prices. Demand is seen as a real danger to the overall production of base stocks. Whilst refiners will continue to produce flexible quantities of gasoline, kerosene, gas oil and fuel oil, to meet demand requirements, base oil production being a relatively small part of the overall barrel ( in terms of quantities ), the percentage cutback effect can seriously question the viability of base oil production.

Since many producers serve their own in-house finished lubricants business, this production will continue, but the economics may have to be revised to reflect the higher inventory and refining costs, and could, just maybe, result in starting to drive prices back up again. Certainly where production is not geared to own-brand finished lubes, there could be an election to cease production altogether, at least on a temporary basis, until demand and the market picks up to a level to accommodate production.

It is difficult to say at what price level these decisions would be considered, and it must vary from producer to producer, but observing the rate at which prices are falling, it cannot be too much longer.

We have seen the first internet tender posted by Alexandria Mineral Oil Co. in Alexandria, Egypt, and the realised prices will be very interesting to see, assuming the tender is taken up, and AMOC receives bids. Some bid prices for Group I solvent neutral grades have been quoted this week around $350 to $375 per metric ton FOB on bids received from potential buyers, but with substantially lower freight costs on vessels of five to 12 kt dwt, there may be some takers who are running low on inventory.

In the Middle East, prices for Group I grades are being quoted by one of the largest producers in Iran at around $500 pmt CIF/CFR United Arab Emirates, on cargoes which have already been delivered, whilst new business for the same grades going into the west coast of India is currently being negotiated at levels close to $540 pmt delivered.

Traditionally, mainland European supplies to this region would have competed with these sources, so when considering these prices it is simple to see where the FOB prices from mainland Europe would have to be pitched, and as suggested above, these levels may be unacceptable to many producers. Also, given that Sepahan is exporting around 250,000 metric tons per year, for European base stocks to compete becomes an increasingly difficult task.

The bright stock conundrum may be on the way to being solved. This puzzle is the disparity between the Group I solvent neutral grades and the price levels of bright stock, where the differential between the grades had spread to some $700 pmt. There are signs that as we approach year end, the bright stock highs are coming off, and we may see some large falls for any sizeable parcels of this grade being shipped in the next few weeks. Prices have been talked at sub $1,000 pmt, but this remains to be confirmed by a completed deal or tender.

Group II and Group III material are still in hiding behind the current market levels, but privately, contract numbers for next year have been talked at levels far below those in the market at the moment, and it would appear in some cases that retrospective discounts may be offered to some buyers to help shore up and maintain the current pricing facade going into the next quarter.

There has been considerable interest from some South African buyers looking for alternative supply options, and even some new players looking to become involved in the sub-Saharan hinterland markets, albeit with smaller volumes and containerised supply. But as prices are squeezed in mainland Europe, and in the Baltic and Black Sea supply points, Russian and other CIS sellers are increasingly looking for new opportunities for supply, at higher achievable price levels which give better netbacks.

Maybe somewhere between the African sub-continent and the European and Russian mainland there is a new marriage about to be announced?
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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.