Is this a market which may have reached its high point, and may now be stabilizing? Or a brief break in the upward momentum? Its difficult to know which.
There are many reports of producers trying in vain to move prices higher, but they are always meeting with resistance from the buying fraternity. Any shortage of material in the market seems to have faded into insignificance, but against this is lower production from Petrogals 185,000 metric ton per year base oil refinery, due to planned turnaround, and the stoppage at Agips Livorno refinery, with 585,000 t/y of base oil capacity, due to union action.
Prices seem to have echoed the lack of feedstock and crude movements over the past week, with Dated Brent at just under $70 per barrel, and WTI showing at levels approaching $72. There is no long term firmness to these levels, and they are fickle enough to sympathize with any economic data which is forthcoming from sources.
Crude movements are again within a narrow range, holding petroleum products in a trapped pricing pocket. Although primary feedstock such as low sulphur vacuum gas oil is now trading above $505 per ton, sentiment is that weakness is just around the corner, and ICE gas oil has declined below $585/t for front month trading, with optimism and /or pessimism for the year-end at close to $600/t. The overall effect of this has been the following.
API Group I base oils in Europe have established their levels at close to last weeks numbers, with small regional variations where demand has outstripped availabilities, adding some $10 to $20/t to FOB prices.
In the main, SN 150 through SN 600 is trading in the range of $755 to $825/t, basis FOB mainland European producers. There appears to be some weakness at the bottom of this range which could mean that some lower priced, lesser quality grades are being priced to assure sales, thus releasing inventory space for other material coming along behind in the supply chain. This could certainly be the case for material from Russia and Belarus being loaded out of the Baltic ports.
One interesting observation on the apparent halt in rising prices is that price variations can be exceptionally parochial. For example, in the Middle East Gulf region, Iranian exporters have been trimming their numbers for exports of SN 500, and recent offers have been made below $800/t, basis either FOB southern Iranian ports, or even FOB U.A.E. This is surprising since only two or three weeks ago these grades were being traded into the west coast of India at levels reflecting FOB prices around $825 to $835/t.
Meanwhile, in South Africa base oil prices have maintained their upward progress and continue to strengthen due to demand for all grades and types of base stocks. Group II imports have been prominent and look to be gaining momentum in this rather conservative market. Prices in this region tend to reflect the higher end of the European market, but with renewed demand South African prices are expected to move to $790 to $865/t for Group I solvent neutrals, and $1,030/t for bright stock. The Group II grades are being marketed from $860 to $975/t. All these prices are ex tank.
In mainland Europe, Group II/II+ imported grades are holding on to price levels established over the last quarter and do not appear to respond to the weekly fluctuations seen with some Group I grades. Importers are looking to sell at $860 to $975/t, perhaps being overstated last week at the lower end of the banding. Rerefined Group II oils are certainly making their presence felt in the market, as the new producers try to gain market share at prices which can be lower by some $50 to $65/t, closer to Group I prices.
Group III continues to be pushed forward as a complementary material to Group I grades to achieve the latest approvals for new passenger car and diesel engine oils. This success story has encouraged new producers of Group III oils in Europe, whilst still supporting imports from Far East producers. There have been no more rumours of low priced Group III oils being hawked around the market, and these oils are selling at a justifiable premium to Group II and Group I grades. Latest prices seen in mainland Europe have been in the spread of $895 to $1,140/t depending on grade, viscosity, and method of sale/transportation.
West Africa figured in the press last week, with an announcement that in Nigeria there is to be another curb on the importers and distributors of base oils (and indeed finished lubricants) in an attempt to upgrade the quality of lubes being marketed throughout the region. This has been put forward before, and lasts for as long as the headlines in the press, but at least it may prevent the return to the bad old days.
Prices in this region have not stabilized, and estimates for the next round of cargoes coming into the area are assessed in the region of $925/t for Group I heavy neutrals and as much as $1,100/t for bright stock, all basis delivered CFR, prime insurance always being covered locally.
The market appears to be balanced overall in the EMEA region, but there are certainly obvious cracks in the scene where production has been interrupted, such as in Italy, but it would seem that there is still plenty of available material to fill any gaps. The situation is not clearly definable, since we may be entering an era of stability, but on the other hand any slight economic or political sentiment could push the market in another direction.
European and Middle East demand just does not seem to be picking up as was forecast at the beginning of the year, and with the fourth quarter of 2009 about to commence, perhaps we have to wait a little longer for all factors to come together to accelerate economic stimulus in the region.
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.