Europe-MidEast-Africa Base Oil Price Report

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The New Year has arrived, and with the beginning of 2009, mixed feelings and comments are being heard from the market regarding the exact science of base oil pricing.

Contrary to last weeks comment that we may see some stability in the market, we have seen crude price hikes of more than $10 per barrel on Dated Brent and WTI. Refined product prices have in some cases moved upwards by more than $100 per metric ton. The causes for these price rises are complex as usual, but can perhaps be boiled down to the political tensions in the Middle East caused by the Israeli-Palestinian conflict, the natural gas problems between Russia and Ukraine (which ultimately affect a number of European countries) and the slight rise in demand in the U.S. for crude and other products.

Where does this lead in terms of base oil prices? The simple answer today is, nowhere at the moment. We are still seeing base oil being discounted on a fixed price basis, and related prices are certainly being offered at the lower end of the ranges. The stocks have not significantly changed from December, when producers were willing to grant special deals to move material, and the production from all known sources has not been cut back to any degree. Demand has not changed, at least not in the first few days of the month, so we are back to where we were during the middle of December.

Given time, we may see producers reluctant to lower the numbers further, but guide prices for API Group I SN 150 and SN 500 are still being talked at anywhere between $375 and $535 per metric ton, basis FOB, depending on quality, parcel size and location. Even at the crude and product price levels of today, refiners can still rely on making an acceptable margin, so perhaps there are still downward price corrections to come?

New material is coming into the region in the form of Group III grades from Malaysias Petronas, which will be stored and distributed in the Mediterranean and Northwest Europe. Having commissioned and completed an enormous, long term investment in the production of Group III base oils, with the European market one of the targets for sale of this material, Petronas must now compete with Group II and even with Group I base oils in order to establish a position in the market.

At the same time further quantities of Group II grades are being imported by Chevron from the U.S. All these inroads into a low-demand market for these particular grades, and with adequate supplies of indigenous Group I material, can only yield one effect: to bring price competition across the region to a more intense level. It should be added that the quantities of Group II and Group III are not significantly large at this time, but nevertheless they will ultimately have an effect on the regions market.

A week cannot go by without mentioning bright stock. The conundrum continues, but at the lower end of the price range, which realistically is very close to the $1,000/ton FOB level. Availabilities of larger quantities are growing, and it must only now be a short time before the barrier price is breached, and the gap between bright stock and solvent neutral grades is closed.

There is very little base oil news from the Middle East this week. Any real activity would appear to be limited to small local cargoes of Iranian material holding on to price levels previously seen in the area of $500/ton basis delivered to the United Arab Emirates. Contracted customers in the U.A.E. and the Middle East Gulf (Persian Gulf/Arab Gulf) are taking their regular supplies from the Mediterranean and Red Sea feed ports, and seem to be placated, at least in the short term, with the prices they are now paying, which have had to come into line with prices from Iranian and Far East suppliers.

West Africa and South Africa have been very quiet during the holiday period regarding the procurement of replenishment cargoes for locations in these areas, although there are signs that cargoes are currently being planned and negotiated for supply into those areas during February and March.

It may be a little early in the month to state exactly where Europe/Middle East/Africa prices lie, and more importantly where they are heading, since many key players in the market have only arrived back at their desks this week, and it may take another few days for the base oil machine to get back up to speed, after what has effectively been a two week holiday period. Next week may tell.

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.

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