Not being of the persuasion to look backwards, we should now be looking at what is currently happening to prices, and how this will affect these levels in the future. What has happened in 2008 is history known to all, and may never be repeated again.
As we approach the beginning of 2009, things are still very much in a state of flux, and with crude levels moving around in stellar fashion, we must surely see further weakness in base oil prices in the first part of the New Year. Currently we are seeing Dated Brent bouncing back from lows, but still below $35 per barrel, and WTI resurrecting itself to a premium above Dated Brent at just over $38.
Yet in Europe, when we look at refined product pricing (and hence at a reflection of base oil feedstock values), we are seeing increases in price levels due mainly to a high number of refinery maintenance turnarounds which have all been coincidentally planned for January. This is leading to at least a balancing effect on the refined products market, and could even create a positive demand factor.
So will this be mirrored by base oil supply? At this time it is hard to align with price increases, but if demand shows even a little growth in the first quarter, due to very low inventories leading up to year-end 2008, we could see a stabilisation in prices of API Group I solvent neutrals from mainstream European producers. This could be a mere blip, due to the famous base oil delay factor, but equally could spell out some respite for producers from tumbling base stock values, at least in the short term.
As predicted, this week has been very slow to show any real market moves due to holidays, but come the start of next week we could witness some interesting developments. Prices of Group I neutrals are still being negotiated at anything between $350 and $490, basis FOB sales, and of course bright stock has not yet moved from its elevated position. But these are notional levels only, since reality will only kick in next week when players return from the festivities.
There are still a number of smaller niche market enquiries coming from South African and East African blenders, but there could be an air of price checking here, since no apparent base oil movements have been reported coming from mainland Europe, Russia or CIS countries. There are availabilities of all grades out of the Black Sea region, and these may fill some of the lower quality Group I requirements in East Africa, United Arab Emirates and India. Sepahan in Iran still has to close the sale of its large 30,000 ton cargo of SN 500 into U.A.E., so this could provide local competition for the Black Sea grades.
Freight levels are interesting at the moment, since some of the larger stand-alone vessels can be chartered for the lowest rates seen for some time, and this could intensify negotiations for larger parcels of Group I material coming from Europe for deep-sea locations in the Far East and environs. More detail on shipping and freight rates would be very interesting to consider for the future.
West Africa has been exceptionally quiet, with mainly contracted barrels moving into the area. Nigeria has been dormant, with only the regular traders still trying to place cargoes, but perhaps banking problems have led to delays in some cases, and this could be one of the reasons for the slowdown. It should be pointed out that not all Nigerian importers and blenders experience financial and banking problems, and they will continue to import under normal terms and conditions as and when the commercial and economic situation allows.
On the theme of looking forward and not back, the industry is certainly facing some real pricing questions for next year, and at least the analysts will be invited to update their forecasts on an hour by hour basis, since it is a brave person who can say with any real confidence where next year will lead.
Will lower prices promote an increase in acceptance of higher cost Group II and Group II+ material, given the technical efficiencies that these products will yield? Will we see prices fall further, back to levels last seen in the early 1990s? Will freight rates allow greater long distance movement of material, making some remote barrels more competitive against locally produced material? Will demand fall during the year in line with global economic expectations?
These are just a few of the questions for our weekly report for next year, where we will try to keep all parties informed not just as to what price levels are, but also why, and perhaps even attempt to predict where they might be going.
In the meantime, Happy New Year.
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.