The rush of enquiries and the promises to clear out inventories from last week have still not materialised, and all the talk of replenishment on a large scale appears still to be in the planning stages, or at least the waiting stages – waiting that is, for base oil prices to fall further. Base oils in total are still long, and supply is now clearly outstripping demand.
Details of base oils being sold at close to $300 per metric ton, or slightly less, are filtering through, although this material is in relatively small quantities, and lower quality than most in mainland Europe would entertain as acceptable blend stock, but nevertheless even this material would not have traded at this level some two or three weeks ago, so the assumption is that the inherent weakness is still in the market, and cannot be reversed at this time.
This type of transaction obviously has implications for the standard API Group l grades, having the effect of pulling them downwards along with sentiment, and with prices of $385/t and $390/t FOB being offered by traders for SN 150 and SN 500, the market is showing its possibilities for lower numbers still. Bright stock is again under pressure to close the pricing gap, and has been seen at sub $900/t basis FOB, and in one unsubstantiated deal, is being negotiated at a level closer to $827.50/t.
Group ll and Group lll prices have seen significant reductions in the last 10 days or so, reflecting the increased amount of overall product coming on to the European and Middle East markets. Perhaps these price levels were in the market already, since these grades appear almost as European posted prices (less confidential discounts of course). This could be the trend for the future, inheriting this structure from the United States and Far East, where many of these grades are being produced. This may help to provide the platform for European posted prices to arrive on the scene sooner rather than later. The Group ll main grades are being priced below $600 in many cases now, and these levels look like falling further in the next few weeks for the following reasons.
The Group ll grades in particular (but not Group lll products, which are going into material specific areas) do not appear to be making significant volume inroads into the domestic Group l market, as they have widely done in the U.S. Rather they are being sold into receivers who had long term plans for utilising these grades to initiate new market or higher spec finished products, such as the new ACEA engine oil grades.
Obviously, the pricing for the Group ll grades sets them above the prime Group l prices today. During the course of the middle part of 2008, there were certain instances when Group ll material became long, and one of the grades was used to compete on price with light solvent neutral grades, which were short in supply at that time, so this move is possible.
Middle East Gulf areas have been relatively quiet with the various holidays, but there have been a number of movements of Iranian SN 500 both into U.A.E. and west-coast India. Prices have decreased a little, to around $480/t CIF/CFR, but the terms of purchase have changed considerably, with a number of buyers paying at sight with, or without letters of credit. At these price levels there still do not seem to be any large cargo movements of Group l base oil from mainland Europe to this area, even given the relatively low freight levels currently being seen in the shipping market.
West Africa is being replenished, and the usual bickering is going on. Cargoes have been loaded and sold at an agreed price, and whilst the cargo is on the water, the FOB values of these cargoes has fallen, which occasionally in West Africa means the re-opening of negotiations after terms and conditions have been agreed and contracts signed. Needless to say, the corollary of this situation never occurs, when the seller would be permitted to re-negotiate when FOB numbers rise.
Prices have fallen dramatically in this area with lower freights and the FOB levels coming down, and prices CFR now landed into Nigeria are in the region of $600-$650/t for the heavy neutrals, and below $1,000/t for bright stock. These levels may fall slightly further, but with freight levelling out, and FOB numbers approaching their netback limits, we may see some stability, not least due to the high costs of administering these types of sales.
At this writing, we are seeing pockets of availabilities where producers have not discounted prices to move their inventory, and other places where suppliers have little or no availability until February production comes on stream. But inevitably these two different sides are converging on the middle, where base oils will sell at the price decided by the buyers, who are totally in control of the weak demand in the market at this time.
*Middle East Gulf is the term used by global shippers and traders for the Persian Gulf/Arab Gulf.
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