FocusSupply issues halt spot Europe base oil trade

24 April 2008 14:17  [Source: ICIS news]

By Shelley Kerr

LONDON (ICIS news)--The European spot base oils market has become paralysed by a lack of availability, driven by a combination of plant outages and competition for feedstock from the gasoil market.

With base oil processing costs outstripping those for gasoil, refiners need to see base oils trading at a premium to gasoil to justify production, several refining sources said.

While gasoil prices power to ever-increasing heights, base oil pricing has not kept pace in recent months. This has prompted many refiners in the European market to reduce their base oils output and seek alternative value in the gasoil pool.

“No-one today would run a base oil refinery at current margins unless they have a lubricants business to run,” said one trader.

The poor returns on base oils manufacturing have added to production issues in Europe, draining the market further.

Scheduled turnarounds in the first quarter have left at least three European refiners short of product, while others preparing for maintenance later in the year have had to stockpile volume to fulfil future domestic needs.

Unscheduled outages have also played their part, with refineries in the UK, Italy and the Netherlands hit by unforeseen outages while a refinery strike in Spain earlier this year led to severe delays for cargo loadings.

The extreme tightness has hit the domestic market, although with most buyers covered by contractual commitments the majority of consumers have managed to ride the storm.

“Things are very tight. I’m glad we have contracts because there is really not a lot of spare about,” said one large volume buyer.

Another large buyer concurred that sourcing cargoes had been problematic: “We have had some challenges, but fortunately we were able to resolve them.”

Spot availability for export also appears to have completely dried up, with no export cargoes shown in the market for some weeks, and most refiners not prepared to show any volumes for May.

Increasing tightness and higher values for crude oil and feedstock vacuum gas oil have seen base oil values power to repeated record highs since the fourth quarter of last year.

After a prolonged period of stability throughout much of 2007, average domestic prices for solvent neutral (SN) 150 rose from $807.50/tonne (€509/tonne) FOB (free on board) NWE (northwest Europe) in late October to $1,105/tonne in late April, according to global chemical market intelligence service ICIS pricing.

Average prices for the same grade in the export market started their ascent somewhat earlier, but also rose $310/tonne in the same period. Much of the steepness in these curves has materialised through March and April.

These price increases have hit independent lubricant blenders hard as they struggle to keep pace with ever-spiralling costs.

“As a buyer I don’t feel in control. You might win the odd skirmish here and there, but it feels like the war is slipping away,” the purchasing manager of a large independent blender said.

Base oil increases were just one of the worries they faced.

“Steel is also on the up. We’ve seen 10-12% on the cost of a new barrel, and the major steel suppliers are talking about another major increase in new barrel costs,” another independent said. "The additive boys are also talking about another price increase, that will be the third this year."

“Its difficult for independent blenders in the market overall," another independent said. "We are trying to push finished lube prices higher and we are finding it difficult. Total demand will be at least level, maybe higher, but who will end up with the improved share?”, adding that oil majors in the finished lube business were more protected against spiralling costs.

Buyers, traders and producers alike have all indicated that there may be a little more volume appearing from late May or June.

However, unless base oils sales can compete with the alternative value in the gasoil pool, these eagerly awaited volumes may not materialise in the spot market.

Not surprisingly, feedback from the producer side has been that prices must rise significantly and at least keep pace with gasoil trends to maintain security of supply, and even buyers were anticipating further hikes in the not too distant future.

“If you look at basic refining economics, we could easily see another $30-40/tonne in the pipeline. Obviously we would not like to see that though. We could do with just a bit of respite to let the market digest where it is before it rises again,” according to one large buyer.

Buyers’ worst fears were confirmed this week when a European oil major announced a $40/tonne price increase effective 1 May.

($1 = €0.63)

By: Shelley Kerr
+44 20 8652 3214

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