With some players filtering back from holiday, producers have initiated increaseson almost all products. Although not on the scale of the rises seen in the past few months, these increases are happening more frequently and are adding up to significant levels.
Perhaps anticipating a new start from the beginning of September, base oil manufacturers may have quietly raised prices now rather than in a couple of weeks in order to avoid resistance from buyers, most of whom are still absent from their desks. The price rises apply to domestic contract business as well as the spot sales end of the market.
Prices have risen by anything from $10 per metric ton in some locations to as much as $50/t in others. These have to be purely cost driven, since there is no demand factor at the moment to provide impetus for these increases. Prices for API Group I solvent neutrals are gauged to be in the range of $740 to $810/t, basis FOB European and North African ports. Bright stock is largely at the same level as last week, around $960 to $1,000/t, same basis.
Costs of raw materials or feed stocks have increased again. With low sulphur vacuum gas oil showing new highs at $535/t this week, and with quantities of hydrocracker bottoms much in demand, base oil prices have justifiable room for upward movement yet again. Some say that the recent base oil moves have taken account of these latest feed stock increases, but these individuals with crystal balls obviously are from the buying fraternity, not from the producers side.
Crude is back up again at recent near-highs, with Dated Brent showing at $73 per barrel, and now being leap-frogged by WTI, which is standing a dollar higher at about $74/ bbl. There are good reasons for this situation with WTI since the contango in physical/futures arbitrage is financially attractive at this time. The forecasts are that crude and product prices will continue to rise through Q3 to the end of Q4, thus suggesting that all other dependent products will ultimately follow suit.
The question is when and by how much.
Oddly enough, prior to the 2008 downturn when crude levels were around the same levels as they are at present, base oil prices were actually lower by some $200/t. However, clean petroleum product prices were also lower than they are at the moment; thus we have a situation where clean petroleum prices are not reflecting crude values in the same way as they did previously.
Life is breathing back into the Middle East Gulf areas, and activity is restarting this week with more enquiries for base oils being floated in the markets. The Iranian barrels of heavy solvent neutrals coming out from the south of the country have been repriced to reflect changes in the market, and can now be set between $775 and $820/t FOB. With the demand for imported bright stock growing in this region, landed prices are being seen at close to $1,100/t, CIF/CFR Iranian ports.
U.A.E. growth appears to be rising again, after the considerable economic downturn in the region, and this may spur importation of more Far East Group II cargoes, along with European Group I cargoes. This potential upswing in the U.A.E. will also help the Iranian exports which had come under some competitive pressure from base oils coming from Singapore and Korea.
West Africa has fallen quiet this week, with little reported activity taking place. There are a number of enquiries around in the market for these destinations but nothing appears to have been firmed or fixed as yet, perhaps due to the new price levels which will hit this import market hard. Until new cargoes are booked and start to move to West Africa, it is unrealistic to put price numbers on business which remains purely hypothetical, by using European FOB levels plus freight to make the theoretic calculation.
Group II/II+ price levels remain buoyant in most case where the material is being imported from the U.S., but there is a distinction to be drawn here between those virgin grades, and the locally produced rerefined European grades which are now starting to take a place in the market.
It has been mentioned that the virgin imported Group II material perhaps carries more approvals and can be utilised more widely, indeed as a global product, as this is written into the design of this material. Whilst the producers of the rerefined oils have perhaps found it more difficult to gain acceptance for their products within the same time scale as the imports, the local material is having to compete with Group I base stocks being used by blenders throughout Europe.
Many believe it is only a question of time before these rerefined oils take their rightful place in the market, but from a pricing stance it is worth noting that these grades do not carry the higher premium which is afforded to the imported Group II grades from the U.S.
This report will continue to base Group II/II+ prices on imports from the U.S., and only into mainland Europe, since there are also Group II imports from the Far East arriving into South Africa and the Middle East Gulf areas. Prices are now between $900 and $1,050/t, but are very much dependent upon delivery location, vis grade and distribution method.
Completing the picture, for Group III there has been little new activity throughout the whole EMEA region. Steady growth continues in the Middle East Gulf areas, and there is growing use of Group III in blends with Group I materials in Europe. There are still wild stories regarding the pricing of some of this material, with tales of giveaway price levels below $600/t. There may be some elements of truth regarding some of these sales, but there are also a variety of justifications why these price levels have been evidenced: some are promotional, some are approval quantities, and some are test blending barrels.
Group III grades generally are placed in a price band between $950 and $1,150/t, same as last week, subject to delivery method and type of product.
Returning to price increases for the future, it looks like base oils will not find stability yet, and have a way to go in merely keeping up with feed stock and clean petroleum prices. With the products market showing real bullish tendencies at the moment, it is safe to say that producers and buyers alike could find themselves in the horns of a dilemma with questions. When to purchase? When to increase production? When to increase prices? And by how much so as not to damage market share? And so on, ad infinitum.
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.