Europe-MidEast-Africa Base Oil Price Report

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Reality has kicked in, and base oil prices are moving upwards. Producers, having sold out lately to sub break-even price levels, are now trying to recoup some of those negative netbacks.

Almost every factor points to prices rising. Crude has breached $50 per barrel, feed stocks have moved and are still moving upwards, and even with low demand, base oil numbers are now being talked at up to $100 per metric ton above prices seen over the last few weeks. API Group I prices for SN 150 and SN 500 have moved to a range of $425 to $520/t, basis FOB main Baltic, Northwest Europe, Mediterranean, and North African ports. The only negative aspect is that demand has not recovered in any shape or form.

Some European domestic blenders are being approached by some suppliers suggesting that increases be applied from April 1. With contracts requiring longer period of notice, even larger increases of up to $120 to $130/t are being mooted for May 1 onwards.

Bright stock has halted all downward momentum and is in recoil, with material being offered from one location at $665/t basis FOB. It has to be emphasised that this is an offer price, not a deal which has been concluded.

The upward price movement has been more pronounced at the lower end of the quality chain, and the Russian producers have put these increases into place much faster than mainstream producers have reacted, but sure as eggs is eggs within a few days those majors will have followed suit. Increases for base stocks are sometimes in excess of 25 percent, showing how far below other counterparts of the barrel base oil levels have lagged.

The increases are being led directly from producers, since with higher feedstock values (low sulphur vacuum gas oil at $382; gas oil futures at $465/$475/$485 for three months) they have no choice other than to pass these costs on down the line. The current turnarounds, limiting the quantity of material available, are also helping producers to pass increases through to buyers.

The peculiar aspect of these price rises is that this is not in response to demand, but purely a reflection of the constituent parts of refinery production, each becoming higher in value. Actual demand remains very much lower than at the same time last year, down by around 30 to 35 percent for the first two months year on year for mainland European Union countries.

Buyers are scurrying to try to pick up what bargains they can find still at the lower levels, offering below $400/t FOB with prompt payment terms, and being turned away. Sellers are resolute and are not giving way on discounted deals, and even at the lower end of the quality scale are asking in excess of $420/t FOB for Group I SN 150 and SN 500/ 650 with low VI and relatively high color.

In Europe, Group II and Group III base oils do not seem to have reacted to the sudden increases which have applied to Group I material, but with time, sources state that the current levels are not sustainable, and these prices will also rise, albeit more slowly.

Prices for these grades are marginally higher at $750 to $800/t delivered for Group II and around $1,000 to $1,100/t for all Group III grades. After last weeks news of Far East producers cutting prices into India and the Middle East Gulf areas, it will be interesting to watch the reaction to the European price movements.

Group I prices hastily moving upwards and narrowing the pricing gap between the product types could create an important selling opportunity for the importers and producers of Group II, II+ and III material.

Elsewhere we are seeing the same trend. In the Middle East Gulf region all but one producer have hiked their FOB or ex tank prices to another level. Prices of $555/t have been quoted FOB Iranian ports for SN 500. The amounts of the increases have been slightly lower than in Europe, given that they had a higher base point to start from, but the Middle East is now leading the region in terms of price highs.

Since late last week there has been a flood of enquiries from West Africa, particularly Nigeria, presumably trying to get on to the band wagon before increases really start to bite. But with constraints of banking procedures and inevitable logistical headaches of trying to load three or more grades (including bright stock) from one or two ports, these delays will push the deals towards higher offers, which will reflect anticipated prices to come. Prices are now being offered in the range of $625 to $650/t for SN 150, 500 and 650 and around $800/t for bright stock, basis CFR West African ports.

No one is quite sure exactly what initiates such market change, and why this occurs when it does, but it has been stated here over the last few weeks that it was only a matter of time before feedstock values impacted on base oils to such an extent that the only direction for prices was upwards. The trick now is reading the market to know how far these factors will ultimately affect prices, given that the supply/demand picture has not radically altered in the meantime.

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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