This is a very confusing scene for buyers and sellers alike. Refiners have not increased production to anything like the levels of some two years ago, so they do not have any spare inventory to play with at the moment. With slightly firmer demand in the market, there would appear to be shortages of material throughout the region.

The most noticeable area in which demand seems to be outstripping supply is in the Mediterranean, where enquiries are growing at an increasing rate for solvent neutral grades which cannot be found. One enquiry for 2,000 tons of SN 150 was met with an offer of just 200 tons of material to keep things moving until replenishment could be made between now and year end. Needless to say, the delivered price for the smaller quantity would be some $75 to $100/t above current perceived market levels.

Somewhat akin to a rubber ball, Dated Brent and WTI crudes have once again retreated from their levels of last week and are trading around $68 and $69 per barrel respectively. But with feedstock movements during the week approaching new highs, for example low sulphur vacuum gas oil marking at $515 to $520 per ton last Friday, there is pressure on producers to move base oil prices higher. The current netback levels from a basket of producers in Europe and Middle East Gulf are still not acceptable to refiners, given raw material costs and rising inventory charges. Estimates are that another $45 to $60/t is required to bring Group I base oil prices into line with clean petroleum returns.

Prices for Group I neutrals are now reckoned to be in the range of $775 to $825/t, similar to last week, but if feedstocks maintain their current levels, then these prices will certainly rise within weeks rather than months.

Bright stock appears to keeping out of the limelight with prices between $940 and $1,000/t, basis FOB mainland European ports. This product has been noticeable by the absence of any real new business being transacted, perhaps due to the scarcity of other accompanying grades to make up spot cargoes.

Contract and domestic pricing for Group I and Group II in Europe is still firm, and there are talks that major suppliers may apply further increases from Oct. 1. However, it must be added that there are also a large number of receivers with high prices accompanied by discounts, or TVAs, which have been introduced as an appeasement. Whether these will be continued or withdrawn after the new increases remains to be seen.

Given the above, the export markets may be the only true guide to actual base oil prices being transacted at this time.

There has been little evidence of any expansion of material from Russian or Belorus refineries, although this material is certainly being sold into the Baltic and German domestic markets. Prices established during the Belorus auction last week were quoted as 430/t for SAE 10, 457/t for SAE 30, and 485/t for M-20B2. These were on the basis FCA Novopolotsk refinery. These prices converted to U.S. dollars basis FOB Baltic are between $675 and $700/t, showing that there are possibilities for healthy margins for this material, although it is cumbersome to obtain and transport to blenders locations.

Group II/II+ prices have been moving in response to increases imposed by U.S. producers over the last month or so, as these products arrive into Europe. Group II base oils now lie in the band of $890 to $1,095/t, basis delivered ex tank, mainland European locations. These oils appear to be competing well with Group I grades, and are making large inroads with many major blenders for at least part of their production portfolio.

Group II material is also coming into the Middle East Gulf region from Far East producers, but here the pricing structure is different from that of the mainland Europe imported grades. These oils are being promoted as Group I alternatives, and are being priced much closer to the Group I levels. Since Group I levels are higher in this region than in Europe, these two groups of lubes are close in price. Prices for Group I are in the area of $840 to $890/t for solvent neutrals, whilst Group II grades are in the region of $875 to $985/t, depending on source, and delivery location within the Middle East Gulf. The Group I material is either of Iranian or Saudi Arabian production.

West Africa has been quiet this week, with discussions only taking place regarding future cargoes. Once more there are rumours of more than one receiver in Nigeria looking to import Group II, although this has not been authenticated.

There could be the possibility for rerefined material from Europe finding a way into this market, which eventually will produce grades of lubricants required for the modern vehicles now being brought into the region. These grades could be imported using flexi-bags in containers, and could prove a valuable outlet for the new production of rerefined oils from Europe. These oils could compete with the current Group I imported grades, certainly on price, and moreover, on quality.

Once again the market is witnessing most petroleum products being out of synch with crude levels. Mogas inventories are now dwindling in the U.S. and Europe after the summer season, but with the market now facing the winter heating oil season, there may still be incongruous product prices hanging around which defy any real explanation. Industry analysts are reacting to the current scenario, and are stating belated reasons for product price movements which do not follow any logical path. This effect is very important for base oil prices, since the feedstock trend is vital to the final netbacks achievable by these grades, and this weird jigsaw puzzle will continue to affect base oil prices, much more so than any crude peaks and troughs, particularly in the short range between $65 and $75 per bbl.

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.