Suddenly, there would appear to be a great deal of base oil for sale in the market. Why this has come about right at this moment is a little unclear, but many sellers, particularly with lower-specification type material, have been aggressively touting their wares in the last few days.
Sales of material from Black Sea and Baltic ports are being pushed hard, at prices which are hard to resist for some traders, but with few end users or receivers ready or willing to buy these quantities, sales are rare. Production from Russia and many former Soviet states is being seen on the export market, particularly light neutral grades.
FOB prices for these types of API Group l neutral grades are in the range of $360 to $400 per metric ton, and whilst lower numbers had been seen more than 10 days ago, these current figures are possibly closer to the real market prices for these oils. The exceptionally low prices seen last week were for lower-quality material, which cannot be compared to the grades being offered now.
The eventual inventory block may just have been caused by the buildup of stocks coming through the system, starting from the landlocked refineries in the East and ending in the blenders tanks in Western Europe or the Mediterranean. Unlike western production, these oils take much longer to navigate the route from refinery to end user, not least of all due to the geography and the distances covered by rail to get these oils to a satisfactory point of sale. (Base oils can sometimes take up to two months from refinery to shipping point of sale.)
Unlike major European base oil production, most of which is produced and shipped from the confines of the refineries, Russia and the Confederation of Independent States produce base oils where the crude oil is found, and where naturally the refinery has been built. The material is then transported thousands of kilometers to shore storage with access to domestic and deep-sea markets.
Whilst production of these Group l grades has not apparently been cut back to any noticeable extent in these refineries, the material still has to be moved and sold, hence the funnel effect may be commencing, with a great deal of material in the pipeline with nowhere to go.
Moving swiftly from one end of the spectrum to the other, prices for Group ll in Europe have not changed significantly this week and are being landed/sold FOB at levels around $580 to $620/ton, basis CIF, at NW European and main Mediterranean ports.
Group ll and Group lll base oils are moving quietly and increasingly into the European market, and even the West African market. News is that at least two West African blenders are considering using these grades for their finished lubes in the future. (We seem to have come a long way from straight bright stock being sold in glass bottles!)
The overall economics could dictate that Group ll and Group ll+ oils in particular are better placed to service this market in the longer term, and could compete with the Group l slate currently used in this region. Prices landed for Group l material into this area are in the range of $585 to $650/ton CFR for the neutrals, and around $1,000/ton CFR for bright stock, depending upon terms and payment.
Interestingly, with Nigerias 330,000-metric-ton Kaduna refinery again out of action, some players were predicting that there would be a larger demand for imported base oils into that country, but realistically Kaduna supplied very little base oil to Nigerias domestic blenders.
Conversely, in the Middle East region this buildup of stocks does not seem to be in evidence. What we have seen from Saudi Arabian and Iranian producers is price-trimming to move their production smoothly, while avoiding any buildup of stocks which could end in fire sales just to move material through the system. There have been a number of planned turnarounds and maintenance projects in this area, so this could have eased any containment problems which may have existed otherwise.
In Yanbu, Saudi Arabia, producers have noticeably reduced their prices for all grades, especially for bright stock; it reportedly has been discounted by as much as $150/ton from previous levels, bringing prices into line with European numbers at $900 to $950/ton FOB depending on quantity and cargo composition.
Digesting the latest industry and economic figures for December 2008, and those just published for January, it is apparent that demand constraints are becoming more and more prevalent throughout our region. The forecast low point will take place during the second and third quarters of 2009, some suggest. This downturn will certainly have a dramatic overall effect on finished lube production, and should perhaps now become part of the planned schedule and strategy for base oil refiners over the next few months — rather than continuing production levels at the same rate as they are at the moment.
*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.