Europes peak production period for finished lubes, particularly in the automotive sector, should be upon us, but there is little sign of any increase in demand for base oils. Status quo describes this week, with no price changes or movement on supply taking place. However there may be some changes just around the corner regarding the costs of base oil production.
At this time API Group I prices have stabilised around $425 to $475 per metric ton, basis FOB main ports, and bright stock is widely available from recognised sellers at $555 to $590/t.
There has been neither pressure from suppliers to move prices upwards, nor from buyers to adjust these numbers downwards. However, a major factor has occurred in oil markets, and the impact will undoubtedly be seen in due course, given the base oil time lag.
Crude oil, using Dated Brent and WTI as markers, has moved up dramatically by some $8 to $9 per barrel during the course of last week, to levels around $57/bbl and $58/bbl respectively. Hence feedstock values are moving to show similar percentage increases in the market. With low sulphur vacuum gas oil trading at over $400/t and showing a rise of more than $50 over one week, and with International Commodity Exchange gas oil front-month approaching $480/t, base oil prices will almost certainly come under strong pressure to move upwards unless this trend is quickly reversed.
If these increases in crude and fuel stocks are signs of rising demand, base oil prices could rise by more than $100/t. But if there is no real demand for base oils, then there will be quandaries for suppliers and buyers alike.
Do producers keep on selling base oils at levels which yield unacceptable netbacks to the refinery, with market demand low and buyers not willing to pay higher prices? Or do they hike their numbers to reflect the cost of production, rather than buyer demand expectation? The latter is most likely, given that this was the reaction when crude prices rose off the floor some two months ago.
One peculiar aspect of the current market is that with all the turnarounds and production cutbacks there is not a great deal of Group I base oil available in the European arena. Enquiries to buy substantial new quantities (3,000 to 5,000 tons) of SN 500 for a term arrangement have reportedly been unsuccessful due to lack of availability of larger volumes of material, irrespective of price negotiations. Buyers were apparently willing to pay a premium over current price levels, perhaps up to $500/t FOB, suggesting that this grade in particular may be in short supply.
Further afield, Iranian producers in the Middle East Gulf region have started to increase export prices for their Group I production to bring it into line with latest Indian market increases. These prices are now seen in the region of $530 to $570/t for the heavy neutrals, basis FOB southern Middle East Gulf ports. Just as in Europe, increasing crude and VGO prices could push Middle East prices even higher.
Other regular suppliers in the Middle East Gulf region are also looking to increase base oil prices, but buyers fears are largely allayed by the present lack of demand.
Group II/II+ and Group III material continues to make inroads to the European and Middle East scene. Group II is being pushed ever harder by sellers taking advantage of the lack of Group I supply to gain a foothold in the marketplace. Prices remain the same as last week.
Many of the sources of Group II, for example in the United States, have reduced their prices, hence numbers in Europe may not move upwards from todays price range of $645/t for the light vis material up to $830/t for the heavier and better NOACK grades.
Group III is making steady progress into both the European and the Middle East markets, basically on the back of Group I for blended material. Group III prices have not moved substantially over the last month or so, and are seen in the ranges of $790 to $875/t basis ex tank supply.
Some imports of Group III have made their way into South Africa, again as a blend component with Group I grades. Prices are reported to be in the same ballpark as the European market, around $800-plus/t landed into South Africa.
Demand is playing a critical role throughout the region, and is effectively some 25 percent to 35 percent lower than even one year ago. If producers are thoughtful and optimise their production levels to serve a reduced market, they may still be able to sell at prices which will yield acceptable netbacks to the refineries, albeit that they will not be selling the same quantities as before. Thus base oils can continue to make a valuable long term contribution to the refinery barrel, alongside other more transparent products which are traditionally valued on a daily basis.
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.