03 January 2008 12:45 [Source: ICIS news]
By Shelley Kerr
LONDON (ICIS news)--Some European base oils buyers are concerned that prices will continue to rise in 2008 while others are more confident that a new period of stability has emerged in the market.
“The second price increase took margins back up to 14%, and in my estimation that makes base oils attractive against fuels,” said one domestic buyer regarding a double round of hikes which added $75-100/tonne (€51-68/tonne) onto prices in November and December.
That may be true of domestic prices, but producers were still struggling with resistance from buyers in the export market, which has seen prices sneak back up very slowly.
Indeed, some said that export prices were unattractive enough that some feedstock had already been diverted to the gas-oil pool, leaving very little material available for export.
Overall the supply and demand picture for 2008 looks more balanced than the feast and famine seen during the 2005 to early-2007 period. Entering the new year, however, scheduled shutdowns planned in ?xml:namespace>
As the year progresses towards the Atlantic hurricane season, fresh anxieties could resurface over the potential impact of any storms which might hit infrastructure in the US Gulf.
Market players may now be a little more cautious in their inventory building. Speculation over a repeat of Hurricane Katrina in 2005 was, in part, to blame for the supply glut which followed in late 2006.
Moving away from the Group I market, a shift towards the increased use of higher quality base oils in Europe is likely to see increased trade flows from Asia, where a plethora of new high-end base oil production facilities is being built.
New capacities of Group II and Group III base oils amounting to 1.8m tonnes/year are expected to go on stream in
Regional Group II and Group III producers are confident the new production to be shipped from early next year would be absorbed by the rising demand for high-end base oils in Europe, Japan and the US, and analysts and buyers are expecting them to hit the Group I market.
Malaysian oil major Petronas plans to sell at least one third of its base oil output from its new plant in Malacca to the European market.
The European base oils market started the year dramatically in 2007 as prices fell off hard. Then after a period of relative stability, the year closed again on a dramatic note as prices rose sharply.
This was followed by a prolonged period of relative stability despite a more volatile pricing scenario in both the upstream markets and the European export market.
A global tightness in the base oils market in late-2005 and 2006 allowed producers to inflate their margins. Feedstock vacuum gas oil (VGO) prices have climbed through much of 2007, while domestic NWE base oil pricing refused to follow that trend for much of the year.
Already healthy base oil margins, as well as the supply overhang in
Producers long on inventory were forced to discount volumes at times throughout the year, resulting in a wider than average differential between domestic and export prices.
As margins began to narrow slowly through the year, a crude spike early in the summer prompted producers to talk of higher domestic numbers. While these failed to materialise at the time, a balanced to tightening market and continued upward pressure on crude and vacuum gas oil finally saw higher numbers pushed through in the fourth quarter.
Producers for their part maintained that price hikes were a responsible reaction to squeezed margins, and were a necessary evil to avoid feedstock being diverted to the gas oil pool, leaving Europe short of base oils.
($1 = €0.68)
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