Following last weeks rumours of a downward trend on base oil prices, general weakness has been observed in many producing and loading locations within the EMEA region, but it must be added that very little business has been concluded at lower levels.
There are current negotiations for several large cargoes of Russian/Belarus API Group I material, loading out of Baltic ports, to be traded to the west coast of India. Aggressive prices are being demanded by the buyers, who have recognised that inventory currently in the Baltic region is approaching 30,000 tons of different grades of base oils.
Quantities in tank could create enough pressure to take prices to new lower levels. Latest numbers for the two normal grades, SAE 10 (SN 150) and SAE 30 (SN 500), are in the region of $680 to $695 per metric ton, basis FOB Baltic ports, but the latest round of negotiations between sellers and traders is expected to exert further pressure.
Buyers are using every trick in the book to lower these FOB prices, and are quoting FCA and DAF levels, which are exposing the sellers margins between refinery gate and loading port. These margins will inevitably be squeezed, and by using other weapons, such as quoting a reduction in export duty by Russia for December of some $10/t, buyers are gaining the upper hand at this moment.
Levels could be seen as low as $660 to $675/t, basis FOB Baltic, if this activity continues.
Many other producers have shrugged off suggestions that prices will have to come down, claiming this Baltic activity is localised and will have little effect on mainstream European and Middle East prices. There are obviously two schools of thought on this matter, and whilst a heads in the sand approach can sometimes work in this arena, the mainstay of opinion within the industry is that all base oil prices will inevitably come down, albeit to different levels depending on location, quality and inventory.
Mainstream European prices are now assessed in the range of $665 to $820/t, for the Group I grades SN 150 through SN 600, with Russian prices at the lower end of the range. These prices are basis FOB Northwest Europe, Mediterranean and North Africa. Showing little movement in price, bright stocks are still in the ballpark of $930 to $965/t, on same basis as above.
The end of 2009 is nigh, with inventories in some refineries relatively high due to two months of depressed demand, and with little sign of economic recovery. Contract negotiations for 2010 are in full swing for local and domestic markets. The new ACEA 9 automotive specification coming on line next year will mount pressure to utilise more and more Group II and Group III grades, which will ultimately affect the European requirements for Group I grades. Whilst a major downturn in the use of Group I material is unlikely, should current production levels be maintained or increased, these grades will undoubtedly come under price pressure.
Group II and Group III appear to be maintaining sales volumes and price levels as before. However, should Group I numbers start on a downward spiral, these grades will most certainly follow the trend, as is happening in the Far East with overproduction and oversupply from new refining sources.
Iranian exports are static, defending their price levels against Group II imports from the Far East and large cargoes of Russian Group I material as mentioned above, leaving the Baltic states using vessels with low freight levels not seen for some time. Price ex Bander Abbas and Bander Bushire are in the range of $785 to $805/t for SN 500, a drop of some $10 to $20/t from previous levels.
West Africa remains calm, with one cargo arriving into Lagos in the last few days. Prices are difficult to assess due to the time lag between negotiations and cargo arrival, but are estimated to be in the band of $875 to $910/t for SN 500/600, with bright stock at $1,025 to $1,050/t, all basis CFR Nigeria.
Within this region, a new interest is being shown regarding the supply of rerefined oils which are being delivered in both flexibags and in bulk. Enquiries for these base oils are appearing in Mauretania, Senegal, Cote dIvoire and Nigeria, and are being used as substitute grades for virgin base oils, due to the advantages on price and quality. Since these grades are mostly rerefined from lubricants containing Group II and Group III base oils, the properties and characteristics can be similar or higher than those of virgin material, with high viscosity index, acceptable colour, and flash point being important criteria.
Prices for rerefined grades in containers has been established at $795 to $825/t CFR West African ports, for SN 150 and SN 500 grades, considerably lower in price than the virgin imports traditionally fed into these markets. Oils in containers are not subject to double handling and storage costs at the port of entry, and can be transported to remote locations whilst maintaining quality and quantity.
Crude and feedstock levels have stabilised to a greater extent, with Dated Brent, WTI and NYMEX again trading in the band of $75 to $80/t, showing little signs of breaking these upper and lower limits, perhaps being held in this range by the high numbers of very high calls and very low puts for crude though 2010. Feedstocks, whilst showing a little more volatility, are relatively stable within a workable range, with low sulphur vacuum gas oil trading at around Dated Brent-plus-$4.55 per barrel, and ICE gas oil showing marginal movements above $600 for front month and beyond.
With all the fundamentals pointing to a stable-to-weak market, it is likely that base oil prices in the EMEA region will come under further buyer scrutiny and may be subject to downward price revision over the short and medium term.
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.